DIGITAL FINANCIAL INCLUSION AND REGIONAL INNOVATION EFFICIENCY: ANALYSIS OF CHINESE PROVINCIAL DATA

Abstract

This research investigates the extent to which digital financial inclusion influences regional innovation efficiency in China. Drawing on provincial panel data from 31 provinces spanning 2011 to 2022, innovation efficiency is first evaluated through stochastic frontier analysis (SFA), where R&D capital stock and full-time R&D personnel serve as inputs and invention patents per 10,000 inhabitants represent the output. Subsequently, fixed-effects regressions with province-clustered standard errors are estimated, accompanied by a series of diagnostic tests, including the Hausman test for model specification, the Wooldridge test for serial correlation, the Breusch–Pagan test for heteroskedasticity, and the Pesaran CD test for cross-sectional dependence. To mitigate endogeneity concerns, instrumental variable two-stage least squares (IV-2SLS) is applied, using the lagged digital finance index as the instrument, with first-stage strength verified through the Kleibergen–Paap rk Wald F statistic and validity assessed via over-identification tests. Mediation analysis is undertaken with delta-method standard errors, considering financing constraints and human capital as mediators, while spatial dynamics are explored by interacting with local digital financial inclusion with an adjacent-weighted measure of neighbouring provinces’ digital financial inclusion. Empirical results show that a one-unit increase in the digital finance index raises innovation efficiency by roughly 2.5 percentage points. This relationship remains robust across alternative estimators, sample adjustments, and instrumental variable specifications. The mediating role of financing constraints and human capital is confirmed, while the interaction between digital finance inclusion and neighbouring levels displays regional variation, suggesting both direct and spillover effects that hold important implications for coordinated regional policies.