Does money buy innovation? The effect of the “Innovative City” pilot on firm innovation in China

This study investigates the “Innovative City” pilot in China and its impact on fostering firm innovation by alleviating financial constraints. Employing difference-in-differences-in-differences approach, we provide strong evidence that the policy significantly boosted firm innovation capabilities, measured by increased patenting. A key mechanism is the program's expansion of bank credit access for firms, particularly benefiting financially constrained firms. Furthermore, the positive impact is amplified in regions with more developed banking sectors and for firms with pre-existing bank relationships, highlighting the role of market frictions. These findings highlight the pivotal role of a competitive and transparent credit market.