12 Dec 2024
Recently, the collaborative paper "Banking prudentials, leverage, and innovation partnership choice in China" by Dr King Yoong Lim and Dr Yang Chen, Associate Professors in the Department of Economics at International Business School Suzhou (IBSS) of Xi'an Jiaotong-Liverpool University (XJTLU), along with two other external collaborators, has been accepted and published in the ABDC A* journal, Journal of Banking and Finance (JBF). This study explores how, against the backdrop of China's ambition to become a knowledge-based economy, innovators choose between state-owned enterprise sponsorship and private financing, and how this choice is influenced by banking prudential regulations and corporate leverage.
As underlined in the 14th Five-Year Plan (2021-2025), China holds an ambition to become a leading knowledge-based economy, though decades of State-driven innovation and Intellectual Property (IP) market development policies have left aspiring innovators facing an imbalanced IP financing landscape. Given this unique IP landscape, from the perspective of an aspiring Chinese innovator’s new venture, his/her patenting partnership choice—stylistically viewed as choosing between seeking own private finance versus tie-up with State-owned enterprises (SOE) in a SOE-sponsored arrangement—is of material significance in the next phase of China’s knowledge-economy development, notably in an era where it increasingly seeks marketization of its IP market.
At the same time, with the adoption of Basel III in the Chinese banking system being an eventual outcome, a tighter but healthier credit lending practice means the incentives influencing innovators’ patenting choices are further influenced by banking regulations. On the one hand, tighter prudential rules, designed to enhance financial stability, can make financiers more risk-averse, and the greater skin-in-the-game effects may reduce the availability of credit for high-risk innovation projects, especially for private firms. On the other hand, these regulations can stabilize the overall system, reduce intermediation costs, and improve loan governance, potentially increasing the overall supply of loans and improving resource allocation. Facing such a dynamic landscape, aspiring innovators therefore face a crucial decision at the onset of their patenting journey: whether to leverage the institutional resources and stable funding of an SOE, or to retain full autonomy by pursuing private financing. Each path comes with trade-offs.
In this paper, researchers examine the effects of banking prudential regulations and their interaction with corporate leverage on the patenting partnership choice in China using a unique matched patent-firm-bank loan dataset. Exploiting the exogenous properties of the idiosyncratic bank prudential reform shocks associated with the post-2012 Basel III regulation, we find that an innovation project for which the financier has stronger prudential metrics is likely to be SOE sponsored. Researchers also find that an innovation project for which the implementing firm has a higher leverage to have a higher likelihood to be privately financed, though improved banking prudentials can mitigate such disproportionate incentive for high leveraged firms in seeking private financing. For typical Chinese innovators, this incentivizes them to settle for a SOE partnership arrangement when going about patenting and commercializing their ideas, even with the additional pseudo-managerial duties that usually come with such arrangements. Indeed, this creates a disproportionate misallocation effect where the higher leveraged private firms would be more inclined to engage in private innovation financing. However, conditional on a project being SOE-sponsored, researchers did find the nexus to translate to positive growth in employment and per-loan innovation productivity. Thus, China presents a unique context where the “win-win” situation of an employment and innovation productivity expansion may not solely rely on a credit expansion shock, but instead through banking prudential reform. However, this is at a cost of continuing SOE dominance in the domestic IP landscape.
Dr King Yoong Lim (in short, King) is an Associate Professor in Economics. Prior to joining IBSS, XJTLU in April 2022, King worked as a Lecturer/Senior Lecturer with the Nottingham Business School, Nottingham Trent University between the April of year 2018 and 2022. He has also worked as a Teaching Associate at the Lancaster University Management School. Kings primary research interest is in the area of Development Macroeconomics, Innovation Strategies (both Macro and Micro), and Energy Economics. To date, his publication includes articles in ABS3/ABDC-A (and above) journals, such as Research Policy, Energy Economics, The Energy Journal, Macroeconomic Dynamics, Emerging Markets Review, Journal of Macroeconomics, BE Journal of Macroeconomics, Economic Modelling, International Journal of Finance Economics, International Review of Economics & Finance, and Scottish Journal of Political Economy. King is also an active participant in the wider research and policy community. He currently serves as an Associate Editor with the journal, Economic Issues (ABS 1; ABDC-B). A three-time STC Consultant with the World Bank Group, King has previously contributed to Malaysia’s Capital Market Masterplan 2, National Innovation Strategy (and its associated GLC Innovation Transformation Programme), and has served as the Lead Consultant in reviewing and re-developing the Kenya Revenue Authorities’ national tax revenue forecasting framework in year 2019.
Dr Yang Chen is an Associate Professor in Xi’an Jiaotong-Liverpool University and has been the Programme Director of Economics and Finance programme from 2016-2019, and the Deputy Director of Research Institute of Economic Integration during 2015-2017. She was mainly responsible for organizing the Conference of Asia and Pacific Economies (CAPE) since 2013 joint with the Asian Development Bank Institute (ADBI). She obtained the PhD Degree in Economics from Nanyang Technological University (NTU). Her research interests mainly include urban economics, public finance, environmental economics, and development issues on Chinese economy. She has published in internationally renowned journals, such as Asia Pacific Journal of Management, Cambridge Journal of Regions, Economy and Society, Oxford Economic Papers, Economic Letters, Energy Economics, Economic Modelling, Finance Research Letters, International Journal of Finance and Economics, Journal of Environmental Management, European Journal of Innovation Management, Journal of Regional Science, Journal of the Asia Pacific Economy, and Urban Studies. Her research projects have been funded by Provincial Government of Jiangsu on talent agglomeration, by Lincoln Institute on fiscal decentralization, and by Asian Development Bank (ADB) on innovation network. She has also published one book as well as multiple book chapters by internationally renowned publisher.
Journal of Banking and Finance (JBF), listed as an ABDC A* and ABS 3 journal, is dedicated to publishing theoretical and empirical research papers spanning all the major research fields in finance and banking. The aim of the Journal of Banking and Finance is to provide an outlet for the increasing flow of scholarly research concerning financial institutions and the money and capital markets within which they function. The Journal's emphasis is on theoretical developments and their implementation, empirical, applied, and policy-oriented research in banking and other domestic and international financial institutions and markets. The Journal's purpose is to improve communications between, and within, the academic and other research communities and policymakers and operational decision makers at financial institutions - private and public, national and international, and their regulators.
12 Dec 2024