Three Empirical Studies on Firms' Financing, Innovation and Environmental Regulations in China


Student thesis: Doctoral Thesis

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Award date24 Aug 2023


This thesis focuses on enterprises’ financing, innovation and environmental regulations in China. And it comprises of three chapters.

In the first chapter, we investigate the effects of formal and informal financing on the innovation activities of small- and medium-scale enterprises (SMEs) in China. While formal finance includes mainly loans from banks, informal finance includes loans obtained outside the banking system -- loans based on personal relationships, loans from online loan providers, and other informal institutions. Our measures of SMEs’ innovation include input and output of innovation and participation in the One Belt One Road (OBOR) projects. Substantial empirical evidence suggests that formal and informal finance propel SMEs to innovate. These findings are robust to alternative measures of innovation and formal and informal finance. We also employ two instrumental variables for the formal financing variable -- firms’ ability to post collateral and the government’s assistance in obtaining bank financing, which help mitigate the endogeneity problem of formal financing. Moreover, we show that increasing research and development (R&D) is a channel through which financing raises SMEs’ innovation activities.

In the second chapter, we examine the effects of environmental regulation on city innovation in China. We treat the two-control zone policy implemented in 1998 as an exogenous shock and exam the effects on four innovation measures -- new firm entry, venture capital investment, patent application, and trademark licensing. Our difference-in-difference estimates show that the policy increased patent application and venture capital investment but reduced new firm entry and trademark licensing. These results suggest that although environmental regulation encourages the adoption of environmentally friendly technologies, it prevents the establishment of new firms.

In the third chapter, we evaluate the impact of Environmental Inspection Program (EIP), which is a novel environmental regulation in China, on the cost of financing. Based on the manufacturing listed firms in China, we carry out a triple Difference-in-difference (DDD) analysis to show the influence of EIP on debt costs. Our results document that EIP increases heavily-polluting firms’ loan costs by 22.79%, and this result is robust to various robust checks. Besides, EIP significantly expands firms’ operation costs, thereby increasing debt costs. Finally, the positive influence of EIP is more substantial in enterprises with poor environmental performance as well as higher information asymmetry, and is weaker in non-state-owned firms, and industries with lower product market competition. Our research of this chapter extends the studies of how campaign-style enforcement or environmental regulation affects firms’ behaviour.