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

24 Pages Posted: 20 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: August 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 favourable institutional settings, the positive effect of rural banking institutions on small business growth is even stronger.

Suggested Citation

Hasan, Iftekhar and Kobeissi, Nada and Wang, Haizhi and Zhou, Mingming, Banking Structure, Marketization, and Small Business Development: Regional Evidence from China (August 2015). Pacific Economic Review, Vol. 20, Issue 3, pp. 487-510, 2015, Available at SSRN: https://ssrn.com/abstract=2647758 or http://dx.doi.org/10.1111/1468-0106.12118

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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