1. Introduction
Strengthening the decisive role of the market mechanism in resource allocation, promoting financial capital investments in the real economy, and supporting enterprise innovation and technological progress are keys to industrial upgrades, sustained economic growth, and avoiding China’s “middle income trap”. However, the financial sector has dual characteristics. First, as the core actor allocating modern economic resources, the financial sector’s efficient operation is conducive to improving the development of the real economy. Second, both the rapid expansion of the financial scale and excessive speculation will result in a deviation from the original goal of financially serving the real economy. Financial development theory does not provide a clear answer at the micro level regarding how to invest limited funds in an enterprise’s innovation and technological progress. After 2015, China’s economic growth entered the “New Normal”, and, during 2016–2020, the country’s potential gross domestic product (GDP) growth will range from 5.7% to 6.7%. In addition, an obvious L-type decreasing trend reveals that, driven by profit-seeking, industrial capital driven is pursuing short-term profits by infiltrating the financial sector, resulting in a lack of core technologies in the real sector, a declining investment rate, and unsustainable economic growth. China’s financial development is relatively inefficient, even as it experiences a quantitative expansion. From this perspective, analyzing the impact of financial development on enterprise innovation therefore has significant theoretical value. However, current studies on the relationship between financial development and innovation investment—most of which focus on either financing constraints or the benefits and challenges of different financial structures—fail to integrate the level of quality of the financial sector caused by financial efficiency and financial competition. Especially in financial markets, different levels of quality will have different impacts, so the relationship between the variables may be nonlinear [
1]. Thus, it is difficult to explain the need for the logical transformation of financial development from scale expansion to efficiency promotion. Thus, considering the important factor of heterogenous enterprise characteristics—i.e., total factor productivity—this paper takes the relationship among financial efficiency, financial competition, and micro-level firm R&D investments as its basic research object. Through empirical tests, we conclude that only improvements in financial efficiency and moderate competition can significantly promote firm R&D. To effectively reduce the impact of financial inefficiency on firm R&D in China, it is important to move from simple expansion to improved financial quality. The conclusions of this article have important practical significance in filling the gap in the existing literature on the relationship between financial development and firm R&D investment, focusing mostly on the aspect of financial scale and the inadequacy of nonlinear effects. It also enriches the study of financial efficiency in the Chinese context and introduces a modest competition mechanism for R&D investment.
5. Conclusions and Implications
This article uses a large sample of data on Chinese industrial enterprises and quantitative and qualitative indicators of regional financial development combined with the characteristics of enterprises based on panel data and the threshold panel method to analyze the impact of firm R&D. We make the following findings. (1) At this stage in China’s economic development, the extensive growth of the country’s finances cannot effectively support innovation, and financial inefficiency exists in the R&D activities of efficient private enterprises, middle-, and low-tech enterprises, and enterprises in underdeveloped regions. (2) The impact of financial efficiency at different thresholds on firm R&D is different. Low financial efficiency, particularly low macro efficiency, is an important reason that financial quantity development is not very effective in promoting firm R&D. (3) Financial competition at different threshold levels impacts firm R&D in different ways, and financial competition that is too high or too low adversely affects firm R&D. Only when financial competition is within a reasonable range can firm R&D be significantly promoted. The main problems in China are low levels of financial efficiency and financial competition, and the inefficiencies of firm R&D can be effectively improved by expanding the quantitative financial scale and improving financial qualitative indicators.
Based on our research in this paper, we make the following policy recommendations.
First, we provide suggestions to reform China’s macro-financial development. China’s financial system reforms have lagged behind its structural economic reforms, and, because of its extensive financial expansion, there remains much room for improved efficiency in China’s financial system. Financial capital has not been properly optimized and configured, resulting in a waste of financial resources that is not conducive to changing China’s economic growth mode and optimizing and upgrading the industrial structure. In particular, the financial development process in underdeveloped regions requires extensive effort to improve the efficiency of the financial system by improving the internal governance level of financial institutions and the cooperation among financial institutions in different regions to guarantee the balanced development of finance in each region. In the future, China’s financial system reforms therefore should focus on “qualitative” development, optimizing the financial structure, and improving financial functions to gradually improve the situation through adequate financial development but a lack of qualitative development.
Second, we provide suggestions for government agencies. The nonlinear relationship between the financial scale and financial system efficiency with respect to firm R&D shows that the contribution of future financial development to firm R&D is relatively dependent on the efficiency level. Therefore, policy-making departments and local governments should devote their full attention to efficiency. Considering the “threshold effect” in financial development, financial efficiency, and firm R&D processes, policy-making departments and local governments should formulate differentiated financial development strategies for each region. When financial expansion reaches a certain effective limit, it should be transformed to adjust the structure and improve efficiency, and attempts should be made to break through the bottleneck of the impact of the financial scale on firm R&D. In addition, a benign interaction mechanism should be developed to expand the financial scale, improve financial efficiency and R&D growth, prevent asset bubbles from falling into over-liquidity, and reduce the harm from excessive development of the financial scale, which results in deviations from the optimal R&D funding in the real economy.
Third, we provide suggestions for micro-financial sector reform. The construction of financial functions should be strengthened, and the technical level of financial practitioners should be improved. Because of the need to strengthen the risk-screening process for innovation projects, China cannot reduce the risk of allocating innovation funds through financial ownership discrimination. Social capital should be appropriately introduced, and the coordinated development of direct and indirect financing should be emphasized. Different measures must be adopted for different enterprises, especially for small- and medium-sized enterprises, to provide multi-level and multi-channel financing systems. The marketization of interest rates should be accelerated, and the original banks should be less concerned about becoming the new gods of the private sector, which will require a corresponding increase in banks’ risk management levels.
Fourth, we provide suggestions for industries and firms. The capital return rate of enterprises in different industries and the innovation ability and production efficiency of firms should be improved. The government should create an atmosphere that encourages firms to make R&D investments and to innovate through channels such as tax reductions, fee reductions, and technical subsidies to narrow the gap in returns between corporate capital and financial capital and to guide financial capital to private enterprises, low- and medium-technology enterprises, and enterprises in underdeveloped regions with high productivity (heterogeneity) to make up for the inefficient allocation of financial capital.
Fifth, we provide suggestions for improving the construction of financial markets. The construction of financial markets should be improved, and the financial structure should be optimized. Both traditional manufacturing and new services or technology-driven enterprises need equity, but banks cannot supply equity, and the other financial institutions are under-supplied. On the one hand, China’s trillions in bank deposits cannot be loaned out. On the other hand, the real economy urgently needs equity capital, but obtaining financing from the domestic capital market is difficult. If China cannot open up more channels for the use of funds, the price of the “limited supply of financial assets” will increase rapidly. A large-scale and deep financial market can ease the credit rationing problem caused by imperfect bank reforms, quickly absorb excess liquidity in the economy and prevent asset bubbles. In addition, the Chinese corporate bond market has certain problems, such as complex listing approval procedures, high thresholds, single nominal interest rates, and hidden fees for non-state-owned enterprises that increase costs. The reforms can include auditing aspects and canceling the traditional methods of first and second batches for the entire year and converting them to approval methods after maturation. Nevertheless, the risk control mechanism should be standardized appropriately by reducing the debt issuance threshold to increase the supply of corporate bonds. In terms of distribution, interest rates should be used as benchmarks and reflect companies’ differential pricing. Moreover, the Chinese corporate bond market should enter a virtuous development track based on market-oriented operations so that bonds can become an important part of the financial market.