Financial Density and Innovation Quality: Evidence from the Geographic Distribution of Financial Institutions in China

Both financial development and technological innovation are critical issues for policy-makers and academics in high-quality economic development. From the perspective of the geographical structure of the financial supply, this paper measures the number of financial institutions within a certain radius around an enterprise using the information on its geographical location and that of surrounding financial institutions to explore the impact of financial density on the enterprise's innovation quality, as well as the transmission mechanism. Rising financial density improves enterprise innovation quality, and this enhancement effect is mainly manifested in patent generality rather than patent originality. As the geographic radius expands, the effect of financial density on enterprise innovation quality increases and then decreases. Financial accessibility and competitive banking channels are the primary transmission mechanisms of financial density on enterprise innovation quality. In addition, the promotional effect of financial density on enterprise innovation quality is heterogeneous according to regional, industry, and enterprise characteristics. Finally, further analysis indicates that financial density will promote both innovation quality and quantity by motivating firms to engage in patent R&D behaviors that are highly technologically advanced. In addition, financial density enhances enterprises' innovation efficiency by increasing bank competition. Similarly, financial density is also conducive to increasing enterprises' commercial credit and financial liabilities. Therefore, the government should accelerate the development of an inclusive financial system, improve the coverage and penetration rates of the spatial layout of financial institutions, and encourage high-quality economic development by encouraging technologically advanced and innovative firms.