Fintech and MSEs Innovation: an Empirical Analysis

TL;DR

This study empirically demonstrates that fintech significantly promotes innovation among micro and small enterprises in China by enhancing strategic incentives, human capital investment, and R&D activities, especially in developed regions and younger firms.

Contribution

It provides new empirical evidence on how fintech influences MSE innovation through mechanisms like strategic incentives and human capital, with detailed heterogeneity analysis.

Findings

Fintech increases MSEs' likelihood to innovate.

Fintech boosts investment and outcomes in MSE innovation.

Fintech has a stronger effect in developed areas and younger firms.

Abstract

Employing a comprehensive survey of micro and small enterprises (MSEs) and the Digital Financial Inclusion Index in China, this study investigates the influence of fintech on MSE innovation empirically. Our findings indicate that fintech advancement substantially enhances the likelihood of MSEs engaging in innovative endeavors and boosts both the investment and outcomes of their innovation processes. The underlying mechanisms are attributed to fintech's role in fostering long-term strategic incentives and investment in human capital. This includes the use of promotions and stock options as rewards, rather than traditional perks like gifts or trips, the attraction of a greater number of university graduates, and the increase in both training expenses and the remuneration of technical staff. Our heterogeneity analysis reveals that fintech exerts a more pronounced effect on MSEs situated in economically developed areas, those that are five years old or younger, and businesses with limited assets and workforce. Additionally, we uncover that fintech stimulates the innovation of MSEs' independent research and development (R\&D) efforts. This paper contributes to the understanding of the nuanced ways in which fintech impacts MSE innovation and offers policy insights aimed at unleashing the full potential of MSEs' innovative capabilities.