Digital Financial Inclusion and Innovation of MSMEs
Inclusive finance, which refers to the provision of appropriate and effective financial services at an affordable cost to all social classes and groups in need of financial services, has achieved remarkable developmental results since it was first proposed by the United Nations in 2005. The Third Plenary Session of the 18th CPC Central Committee in 2013 explicitly proposed “developing inclusive finance”, and at the end of 2015, the State Council issued the “Plan for Promoting the Development of Inclusive Finance (2016–2020)” (referred to as the “Plan” below), which made the development of inclusive finance an important national development strategy. The plan emphasises the need to build a comprehensive inclusive financial services system, noting that the development of inclusive finance in China should be based on the principles of equal opportunity and economic sustainability and should be market-driven to provide appropriate and effective financial services to all segments of society. At present, inclusive finance has gradually expanded from small loans to comprehensive financial services. Digital financial inclusion is the digitalisation of inclusive financial services. The development of digital finance has improved the accessibility and convenience of financial services and has become an important means of achieving inclusive finance.
A large number of publications in the literature show that innovation is the main driver of economic development. Innovative enterprises tend to be high risk and thus prone to financing constraints. In order to promote high-quality economic development and technological progress, the financial system must be improved. Micro-, small-, and medium-sized enterprises (MSMEs) play an important role in technological innovation and promoting economic development. According to the Ministry of Industry and Information Technology’s 2022 report, MSMEs contribute more than 50 per cent of China’s fiscal revenue, more than 60 per cent of the GDP, and more than 70 per cent of technological innovation, accounting for more than 90 per cent of the number of enterprises. While MSMEs are impressive in terms of quantity and quality of development, they tend to face serious financing constraints in the development process due to the small scale of financing, poor qualification guarantees, imperfect credit records, and information asymmetry. Improving the financial capability of vulnerable groups and promoting the development of MSMEs is one of the main strategic objectives of inclusive finance policies. The development of inclusive finance contributes to the improvement of the financial infrastructure, providing guarantees for the technological innovation of MSMEs and the development of the economy.
In this article, we mainly focus on four vital questions: (1) What are the effects of digital financial inclusion on MSMEs’ innovation? (2) Through what mechanisms does digital financial inclusion affect MSMEs’ innovation? (3) What are the heterogeneous characteristics of digital financial inclusion on MSMEs’ innovation? (4) As a new type of financial service, what improvements can be made to digital inclusive finance?
This paper merges the Peking University Digital Financial Inclusion Index of China with the innovation data of micro-, small-, and medium-sized enterprises (MSMEs) from the National Bureau of Statistics and empirically verifies the facilitating effect of the development of digital financial inclusion on the technological innovation of MSMEs with a double fixed-effects model and the instrumental variables method. This paper finds that digital inclusive finance has a positive effect on the technological innovation of MSMEs. Digital inclusive finance promotes innovation in MSMEs by alleviating financing constraints and stimulating consumption demand. The innovative effect of digital inclusive finance does not show significant differences for firms with different levels of technology, implying a lack of targeted incentives for innovation. Significant regional differences exist in the effects of digital inclusive finance. The central and western regions outperform the eastern regions, indicating that digital inclusive finance plays a strategic role in promoting balanced regional development.
2. Literature Review
Digital inclusive finance is an important form of digital finance and inclusive finance, and the existing literature has conducted extensive research on the development of digital inclusive finance.
3. Theoretical Analysis
Digital inclusive finance is an inclusive financial service conducted in a digital manner, providing comprehensive financial services including but not limited to microcredit for the poor and MSMEs, thereby meeting needs of individuals and enterprises. Innovation is the main driving force of economic development, and whether digital inclusive finance can promote technological innovation in MSMEs is an important basis for testing the effectiveness of digital inclusive finance development. Based on the service targets of financial inclusivity, we argue that digital inclusive finance mainly promotes innovation in micro-, small- and medium-sized enterprises in two ways, as described in the following paragraphs.
Digital inclusive finance promotes firm innovation by alleviating the financing constraints of MSMEs.
Digital inclusive finance stimulates enterprise innovation by promoting consumer demand.
4. Model and Variables
The data on microenterprises provided in this paper come from the 2008–2014 National Innovation Survey Enterprise Database of the National Bureau of Statistics (NBS). This database provides detailed information on the innovation activities of industrial and related service enterprises, making it the most comprehensive database for researching the innovation activities of microenterprises in China. It is worth noting that the current articles on the impact of digital financial inclusion on the economic activities of microenterprises often fall into the misuse of data and fail to categorise enterprises properly according to their size. As digital financial inclusion mainly works for MSMEs, we classify all enterprises into large, medium, small, and micro enterprises according to the Provisions on the Classification Standards for Small- and Medium-sized Enterprises jointly issued by the Ministry of Industry and Information Technology (MIIT), the National Bureau of Statistics (NBS), the Development and Reform Commission (DRC), and the Ministry of Finance (MOF) in 2011. We removed the samples belonging to large-scale enterprises and retained only the samples of MSMEs in the data to provide a more accurate analysis of the impact of digital financial inclusion.
We merged the above two databases by city name and year and finally obtained the panel data from 2011 to 2014. The other provincial and municipal control variables used in this article are from the National Bureau of Statistics (NBS) of China and the China Urban Statistical Yearbook.
4.2. Empirical Strategy
4.3. Endogeneity Issues
4.4. Mechanism Analysis
In order to verify whether digital inclusive finance can alleviate financing constraints and promote corporate innovation, this paper measures the external financing dependence of the industry in which the firms are located. If digital inclusive finance can indeed promote technological innovation by alleviating the financing constraints of the firms, it should be possible to observe that firms located in industries with a higher degree of external financing dependence are promoted more significantly. The National Bureau of Statistics (NBS) published the composition of capital by industry from 2011 to 2013, including enterprises’ own capital, domestic loan funds, bonds, foreign investment, and other sources of money; we use the ratio of all capital other than enterprises’ own capital to the whole amount of capital to measure the degree of industry reliance on external financing.
In Equation (4), denotes the industry’s external financing dependence degree, and m denotes the industry. If is positive, it can indicate that with the development of digital inclusive finance, the technological innovation ability of enterprises in industries with higher external financing dependence is much more improved.
Among them, and are the estimated parameters that this paper mainly focuses on, Equation (5) measures the effect of digital inclusive finance on consumption, and Equation (6) measures the effect of the consumption level on the innovation ability of enterprises. When both estimated coefficients are positively significant, it indicates that the demand-led effect is an important mechanism for the development of digital inclusive finance to promote the innovation of manufacturing enterprises.
5. Results and Discussion
5.1. Baseline Results
5.2. Instrumental Variable Method
5.3. Other Robustness Tests
5.4. Underlying Mechanisms
5.4.1. Financing Constraints
In order to test the role of the financing constraint mechanism in the process of the level of digital inclusive finance development affecting firms’ innovation, this paper adds the interaction term between the financing constraint and the level of digital inclusive finance development in model (1) to form model (4). Specifically, we use the industry financing constraints to which the enterprise belongs to portray the financing constraints of the enterprise. If the industry is more dependent on external financing, then the financing constraints faced by enterprises are more severe.
5.4.2. Demand-Led Mechanisms
5.5. Heterogenous Effects
5.5.1. Heterogenous Effects of Firms’ Technology Levels
The high-tech industry is the main force of enterprise technological innovation and the promotion of the high-quality development of the economy; meanwhile, there is no lack of small- and medium-sized micro-enterprises in high-tech enterprises. In order to explore whether the development of digital inclusive finance improves the technological innovation ability of high-tech enterprises, we classify the technological level of enterprises in accordance with the classification standard for high-tech industries (manufacturing) issued by the National Bureau of Statistics in 2011. The National Bureau of Statistics (NBS) has classified the technology level of all manufacturing industries into six categories according to the level of R&D inputs, including pharmaceutical manufacturing, aerospace equipment manufacturing, electronic and communication equipment manufacturing, computer manufacturing, medical equipment manufacturing, and chemical manufacturing. Therefore, we construct a dummy variable for high-tech manufacturing industry, which takes the value of one if the industry to which the enterprise belongs is a high-tech manufacturing industry and zero if the industry is not a high-tech manufacturing industry. We first classify all MSMEs according to whether they belong to the high-tech level manufacturing industry, and then we test the effect of digital financial inclusion development on the innovation ability of enterprises in the subsample of high-tech level manufacturing enterprises and other level manufacturing enterprises, respectively, and further add the interaction term between the level of digital financial inclusion development and the dummy variable of the industry’s technological level into Equation (1) to test the difference between the two types of sub-samples.
5.5.2. Regional Heterogeneity
The development of digital inclusive finance in China has obvious spatial agglomeration and regional heterogeneity. The development of digital finance has eased the differences in financial resources between regions so that the promotion effect on enterprises in regions that are less economically developed should be more significant. For example, the central and western parts of the country, where economic development is lagging behind, are more likely to benefit.
In order to test the heterogeneity of the effect of digital inclusive finance in different regions, we divide the entire sample into two sub-samples, the eastern region and the central and western region, according to where the enterprises are located.
5.5.3. Different Dimensions of Digital Financial Inclusion
The digital financial inclusion index consists of three dimensions, namely, the breadth of digital financial coverage, the depth of digital financial use, and the degree of digitalisation of financial inclusion; each of these three dimensions contains a number of specific indicators. In this part, we further use these three indices to analyse the impact of the different dimensions of digital financial inclusion on enterprise innovation. Among them, the breadth of coverage indicator reflects the extent to which the supply of digital financial services can ensure that users receive appropriate services. Unlike traditional financial institutions, where the ability to reach users is reflected in the number of financial institution branches and financial service staff members, digital finance’s ability to reach customers is reflected in the number of e-accounts. The depth of digital financial usage measures digital financial inclusion from two perspectives: from the perspective of the types of financial services, including payment services, money fund services, insurance services, investment services, and credit services; and from the perspective of the usage, including both the total actual usage indicator (the number of people using these services per 10,000 Alipay users) and the activity indicator (the number of transactions per capita and the amount transactions per capita). The digitisation indicator measures the degree of digitisation of inclusive finance; specifically, a more convenient (e.g., high ratio of mobile payments to total payments), lower cost (e.g., low interest rates on consumer and micro-enterprise loans), and greater credit usage (e.g., high ratio of unsecured payments to total payments) of digital financial services reveal a higher degree of digitisation. Since the development of digital inclusion can be measured in different dimensions, we have further explored the heterogeneous impact of different dimensions of digital inclusion on firm innovation.
6. Conclusions and Recommendations
In October 2023, the Central Financial Work Conference proposed for the first time the strategy of a “strong financial country”. In recent years, China has gradually taken an advantageous position in the international arena in terms of the development of digital technology. Digital inclusive finance is an important form of digital finance and inclusive finance, and the results in this paper show that the development of digital inclusive finance in China has a significant incentive effect on enterprise innovation and plays an important role in promoting the high-quality development of the economy.
The results of this paper demonstrate that the original purpose of digital all-inclusive finance is basically realised. Unlike existing studies, this paper argues that digital inclusive finance works through two mechanisms: alleviating financing constraints and promoting consumption. On one hand, the development of digital inclusive finance eases the financing constraints of enterprises and enhances their innovative capacity. On the other hand, the development of digital inclusive finance expands consumer demand, which is an important incentive for innovation.
With reference to the present findings, we provide some practical guidance for the development of digital inclusive finance:
First, for firms with different levels of technology, digitally inclusive finance has played an important role in fostering innovation in both high-tech and other firms. However, high-tech firms have not shown a stronger facilitating effect relative to other firms. In the future, the precision of digital inclusive finance can be improved to increase support for high-tech firms with relatively higher risks and more serious financing problems, so that digital inclusive finance can better serve the innovative development of MSMEs.
Second, for different regions, we find significant differences in the impact of digital financial inclusion on MSME innovation. In the central and western regions, digital financial inclusion has a significant impact on firm innovation, but in the eastern region, digital financial inclusion does not significantly promote firm innovation. This difference may be due to the lower level of economic development in the central and western regions, which are more dependent on inclusive finance. Many more efforts should be made to develop digital and financial infrastructure in the central and western regions so that more people can gain access to financial services and the development of less economically developed regions can be promoted.
Third, for the different dimensions of digital financial inclusion, continuing to improve the breadth of coverage and depth of use is an effective way for digital financial inclusion to promote innovation in MSMEs. Digital inclusive finance should endeavour to provide more comprehensive financial services to more people, but financial risk is an inevitable problem. The government should help low-income groups and micro-, small-, and medium-sized enterprises (MSMEs) to improve their financial literacy, make reasonable investments, and prevent financial risks to make digital inclusive finance function well.
In China, the development of digital financial inclusion has not been occurring for long, but it has been somewhat effective. Digital finance and financial inclusion are important directions of financial development and necessary elements to improve the financial system. The findings of this paper present some feasible suggestions for the development of digital inclusive finance, which can help regulate digital inclusive financial services and enhance the ability of digital inclusive finance to promote economic development. Digital finance may entail a variety of risks, and further research is needed on how to prevent risks while enabling digitally inclusive finance to promote innovation and economic development.
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