Banking Structure, Marketization and Small Business Development: Regional Evidence from China

Pacific Economic Review, Volume 20, Issue 3, pages 487–510, August 2015

BOFIT Discussion Paper No. 11/2015

35 Pages Posted: 14 Apr 2015 Last revised: 21 Aug 2015

See all articles by Iftekhar Hasan

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Nada Kobeissi

Long Island University

Haizhi Wang

Illinois Institute of Technology - Stuart School of Business

Mingming Zhou

University of Colorado, Colorado Springs - College of Business

Date Written: March 27, 2015

Abstract

This paper provides an empirical examination of the regional banking structures in China and their effects on entrepreneurial activity. Using a panel of 27 provinces and four directly controlled municipalities from 1997 through 2008, we find that the presence of large banking institutions negatively correlates with small business development in local markets and that this negative relation is driven mainly by participation of large banks in the short-term loan market. Rural banking institutions, in contrast, are found to promote regional entrepreneurial activity. Moreover, large state banks facilitate small business development in concentrated markets. When we interact measures of banking financing by state banks and rural banking institutions with a set of provincial level marketization indexes, we find that extensive marketization, factor market development, and sophistication of legal frameworks mitigate the negative effect of large state banks on small business development. In provinces with advanced market development, efficient factor markets, and favorable institutional settings, the positive effect of rural banking institutions on small business growth is even stronger. Finally, we present evidence that banks do a better job of promoting regional entrepreneurship when it occurs in conjunction with policies to foster innovation activity and assure protection of intellectual property rights.

Keywords: banking structure, marketization, small business development, China

JEL Classification: G21, O16, P23, P25

Suggested Citation

Hasan, Iftekhar and Kobeissi, Nada and Wang, Haizhi and Zhou, Mingming, Banking Structure, Marketization and Small Business Development: Regional Evidence from China (March 27, 2015). Pacific Economic Review, Volume 20, Issue 3, pages 487–510, August 2015 , BOFIT Discussion Paper No. 11/2015, Available at SSRN: https://ssrn.com/abstract=2593765 or http://dx.doi.org/10.2139/ssrn.2593765

Iftekhar Hasan (Contact Author)

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Nada Kobeissi

Long Island University ( email )

720 Northern Boulevard
Brookville, 11548-1327
United States

Haizhi Wang

Illinois Institute of Technology - Stuart School of Business ( email )

Stuart Graduate School of Business
565 W. Adams St.
Chicago, IL 60661
United States

Mingming Zhou

University of Colorado, Colorado Springs - College of Business ( email )

1420 Austin Bluffs Parkway
Colorado Springs, CO 80933-7150
United States
1-719-255-5153 (Phone)

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