Technological progress, financial constrains, and digital financial inclusion

Plain English SummaryTechnological progress can lead to a heightened demand for external funding. Using a comprehensive survey of small and medium-sized enterprises (SMEs), this study examines the relationship between technological progress and the financial constraints faced by SMEs. More importantly, we account for the heterogeneous impact of access to different external financing and find that technological progress will incur a higher level of financial constraints, particularly for firms relying on indirect financing methods. We also find that digital financial inclusion can help to alleviate these financial constraints. The implication of our study is that policymakers should prioritize measures to improve the efficiency of banking systems and enhance lending opportunities for innovative SMEs, while also promoting the growth of digital financial inclusion. This paper explores the relationship between technological progress and the financial constraints faced by small and medium-sized enterprises (SMEs), as well as the role of digital financial inclusion in alleviating these constraints. Our study utilizes a unique dataset of SMEs in a coastal province of China to arrive at the conclusion that technological progress is positively associated with SMEs' financing gap. This relationship is stronger for SMEs that depend on indirect debt financing. Moreover, digital financial inclusion, especially the depth of digital financial inclusion and digitalization level of financial service, can mitigate the adverse effects of technological progress on SMEs' financial constraints. The coverage of digital financial inclusion, on the other hand, has no discernible impact.