A Study On The Effect Of Financial Development On Innovation In China

As a key role of modern economy, efficient financial system is critical to innovation activities. To change the mode of economic growth and achieve the goal of establishing an innovative country, China needs to improve the ability of innovation. Therefore, it is important to have a systematic and comprehensive study of the effects of financial development on innovation.On the basis of statistical analysis of financial development and innovation activities in China, we analyze the mechanism of financial development on innovation in view of financial functions perspective. Efficient financial system helps ease financing constraints of innovation activities and promote innovation by savings mobilization, resource allocation, information production and risk diversification. Furthermore, following Schumpeter innovation framework, we set up two models which discuss the effect of financial development on two different types of innovation activities including imitation and innovation. Meanwhile, we also extend a two-stage model of technological progress and analyze the role of financial development in the transition process from imitation to innovation.Moreover, we observe a huge gap of innovation performance between state-owned enterprises (hence SOEs) and non state-owned enterprises (hence non-SOEs), whereas SOEs enjoy a deeper money pocket to bank loan than non-SOEs. In the empirical section, using a panel data of China’s industrial sectors from year2000to2010, we examine the relationship between immitation, innovation output, financial repression, the proportion of SOEs and other control variables and provide some new evidence of innovation activities in China. The main conclusions of this paper are:First, by addressing asymmetric information, moral hazard and other problems, financial development significantly contributes to the innovation activities including imitation and innovation. Financial development also helps the transition process from investment-driven to innovation-driven.Second, financial development has a significant and positive effect on technology imitation in China. We find that the higher proportion of state-owned economy in a region, the more expenses spent on imitation in the region. The results also suggest that financial discrimination may lead to SOEs’reliance on imported technology.Third, financial development has a significant and positive effect on independent innovation in china. The empirical results show that the higher proportion of state-owned economy in a region, the lower innovation output it has. In addition, we also find that the financial ownership discrimination is mainly responsible for poor performance of independent innovation of SOEs.Fourth and finally, our model suggests that the contribution of independent innovation to growth increases while the contribution of imitation decreases when an economy approaching the technology frontier. Therefore, reducing financial repression and promoting financial development is helpful to innovation and sustainable growth.