Finance Research Letters 47 (2022) 102956

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Finance Research Letters

journal homepage: www.elsevier.com/locate/frl

How does the development of digital financial inclusion affect the

total factor productivity of listed companies? Evidence from China
Yang Chen a, Shengping Yang b, Quan Li a, *
a
School of Finance, Nankai University, Tianjin 300350, China
b
Department of Fund and Intermediary Supervision, China Securities Regulatory Commission, Beijing 100033, China

A R T I C L E I N F O A B S T R A C T

Keywords: Since 2010, the Chinese government has focused on supporting the development of financial
Digital financial inclusion inclusion through various policies. New technological advances have led to the vigorous devel­
Total factor productivity opment of digital financial inclusion, which has a broad impact on market participants. We
Financing constraints
examine how digital financial inclusion affects the total factor productivity of listed companies in
China. Using data on listed companies and the Digital Financial Inclusion Index from 2011 to
2020, our empirical results show that the development of digital financial inclusion has no
positive impact on the total factor productivity of listed companies. Although previous studies
have shown that digital financial inclusion can solve the financing constraints of small and micro
enterprises, our results prove that it cannot play a similar role in the sample of listed companies.
We find this negative effect to be significant for state-owned enterprises, but not for a separate
sample of non-state-owned enterprises. However, in large cities with concentrated financial re­
sources, digital financial inclusion can greatly improve the productivity of listed companies,
which indicates that the development of digital finance requires the solid foundation of tradi­
tional financial systems to be fully effective.

1. Introduction

The concept of financial inclusion was first proposed by the United Nations in 2005, and has since been introduced in China and
recognized by the Chinese government. In 2010, the Financial Inclusion Coordination Committee led by the People’s Bank of China
was established, and China has since begun to build a comprehensive financial inclusion system. The government’s Development Plan
for Financial Inclusion (2016–2020) details how China will accelerate the integration of financial inclusion and digital technology, and
innovations in computer technology and mobile internet are central to this development. Artificial intelligence, big data, and
blockchain technologies have enabled large volumes of digital finance data to be processed at low cost and low risk (Gomber et al.,
2018). Thus, digital processes have helped to increase the scope of financial inclusion across financial services, bringing into its
business scope potential users with no previous access to traditional financial methods (Buchak et al., 2018). The Chinese digital
economy strategy is a key development strategy and the Government Work Report of The State Council of China in 2021 states that
China must “accelerate digital development, create new advantages of digital economy, and jointly promote industrial digital transformation”.
If the development of the digital economy is fully integrated with the financial system, financing constraints at all levels of society can
be alleviated, and the resulting increase in internal liquidity can improve the productivity of enterprises and their ability to innovate

* Corresponding author.
E-mail addresses: yangshp@csrc.gov.cn (S. Yang), nkdale@126.com (Q. Li).

https://doi.org/10.1016/j.frl.2022.102956
Received 20 March 2022; Received in revised form 26 April 2022; Accepted 4 May 2022
Available online 10 May 2022
1544-6123/© 2022 Elsevier Inc. All rights reserved.
Y. Chen et al. Finance Research Letters 47 (2022) 102956

(Chang and Tang, 2021), thus achieving the goal of high-quality development.
Total factor productivity (TFP) has been an important quality indicator of economic growth since China’s reform and opening-up.
Brandt et al. (2012) find that TFP growth osmosis is a source of output growth. The high-speed growth enjoyed by China in the early
21st century is now over, and the demographic dividend is rapidly disappearing (Cai and Lu, 2016). The current national policy in­
dicates that only high-quality development can overcome the “middle-income trap” and that the best approach to promote economic
growth is to improve TFP (Glawe and Wagner, 2019). Studies conducted in the early stages find that financial development had no
impact on enterprises’ TFP (Chen, 2006). But follow-up studies indicate that financial development can provide a “technology
channel” or an “efficiency channel” to encourage TFP growth (Han et al., 2015). A developed financial market and a high level of
external financing can significantly improve the level of innovation, while a financial mismatch can lead to reduced TFP (Hsu et al.,
2014). The combination of digitization and financial inclusion presents an excellent opportunity to extend the financial market (Gabor
and Brooks, 2017).
The development of digital financial inclusion affects economic growth through two important channels: promoting entrepre­
neurship of small and medium-sized enterprises and stimulating household consumption (Liu et al., 2021), which indicating that the
beneficiaries of digital financial inclusion are mainly individuals and micro enterprises. Abbasi et al. (2021) examine the data of SMEs
in 22 OECD countries and confirm that the application of fintech improves the efficiency of SMEs, and that digital financial inclusion
effectively removes individuals’ financing constraints. However, other studies find no significant difference between borrowers who
obtain credit through digital means and fintech and those borrowing from traditional financing channels in the financial markets of
some countries (Di Maggio and Yao, 2019), suggesting that these enterprises still suffer from financing constraints. The use of the
digital technology improves the allocative efficiency of labor factors by reducing the time and space barriers of workers, which has an
impact on productivity (Acemoglu et al., 2018). Whereas Cai et al. (2021) find that although digital financial inclusion can alleviate the
consumption budget constraints of the unemployed, the resulting increased mobility of low-skilled employees decreases the labor
productivity of listed companies .
In conclusion, digital financial inclusion can promote the development of SMEs. However, whether it can alleviate the financing
constraints and have a positive impact on the TFP of listed companies remains an open question. So in this study, we take the
perspective of Chinese listed companies to examine the effects of digital financial inclusion development on their TFP.

2. Data and empirical methodology

2.1. Data source and sample selection

Our research sample consists of A-share companies listed on the Shanghai and Shenzhen stock exchanges from 2011 to 2020. The
samples are screened according to the following principles:(1) exclude listed companies in the financial industry; (2) exclude delisted
and listed companies with risk warning labels; (3) exclude companies with less than 3 years in the sample period. We obtain a final
sample of 26,838 firm-year observations from 3,267 listed firms. The Digital Financial Inclusion Index we use was compiled by a joint
research group composed of the Peking University Digital Finance Research Center and the Ant Group Research Institute, which owns
several digital financial products including Alipay and has more than 1 billion users in China (Guo et al., 2020). The index mainly
consists of data on Ant Group users’ trading accounts, which are representative and widely used in Chinese research. The data of listed
companies are mainly from the China Stock Market Accounting Research (CSMAR) and Wind databases. Provincial and municipal data
are mainly from the China Statistical Yearbook. All continuous variables are winsorized at the 1% level in both tails to avoid the in­
fluence of extreme values.

2.2. Variable definitions and model specification

TFP is used as the main dependent variable to reflect the overall efficiency of how enterprises transform various inputs into outputs.
We use the semi-parametric method to estimate TFP, based on the method of Levinsohn and Petrin (2003). An enterprise’s main
business income is used as the output index, its net fixed assets, employee wages, cash for purchasing goods, and paying services
constitute the input index, and the corresponding price index is used for adjustment to avoid estimation bias. At the same time, we use
the improved TFP estimation method proposed by Wooldridge (2009) as a robustness test.
The Digital Financial Inclusion Index (DFII) is our main explanatory variable. We mainly use the natural logarithm of the provincial
index for the regression in the empirical test, and the logarithm of the municipal index for the robustness test.
To explore the impact of regional digital financial inclusion development on the TFP of listed companies, we construct the following
empirical model:
∑
TFPi,t = β0 + β1 DFIIc,t + βj Controlsj,i,t + γ i + μt + δc + εi,t (1)

TFPi,t represents listed firm i’s TFP in year t, DFIIc,t represents the Digital Financial Inclusion Index of region c in year t, Controls
represent a series of control variables, γi represents firm fixed effects, μt is time fixed effects, and δc is province fixed effects.

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Y. Chen et al. Finance Research Letters 47 (2022) 102956

3. Empirical results

3.1. Baseline regression and robustness testing

Table 2 reports the results of the impact of the development of local digital financial inclusion on the TFP of listed companies. The
results are divided into four parts. The regression results in Column (1) only control for firm and year fixed effects, while the control
variables and province fixed effects are included in Column (2). In Columns (3) and (4), the explained variables are transformed into
TFP calculated using the Wooldridge method, which thus represents a robustness test. The regression model is the same as in the
previous two columns. The baseline regression results show that the coefficient of DFII is negative in all models and significant at the
1% level. After controlling for more variables, the coefficient of DFII decreases, indicating that the control variables effectively absorb
the impact on enterprises’ TFP. In general, the development of local digital financial inclusion significantly reduces the TFP of listed
firms. This indicates that the positive effect of digital finance on the productivity of small and micro enterprises is not successfully
replicated in listed firms, possibly because digital financial inclusion does not result in more relaxed financing conditions for these
firms.
We also use the amount of telecom business per capita in the region as the instrumental variable to mitigate the impact of potential
endogeneity on the results. Column (1) of Table 3 provides the results of the two-stage least squares (TSLS) method after adding the
instrumental variable. The coefficient of DFII remains negative and significant at the 1% level, indicating that no serious endogeneity
occurs in the model. We further ensure the robustness of our results by changing the explanatory variable and sample. In the regression
in Column (2), we replace provincial DFII with city-level DFII, and the results remain the same. In the regression in Column (3), we
remove all observations from 2020 to avoid the effects of COVID-19 on listed companies, and the results remain significant. This
indicates that the conclusion drawn from our baseline regression is robust.

3.2. Further analysis

Financing constraints can significantly reduce the listed firms’ TFP (Caggese and Cunat, 2013; Hopenhayn, 2014). In the process of
digital financial inclusion, more information about SMEs can be obtained through digital technology, financial institutions can be
encouraged to develop financial products and services that meet the needs of SMEs, thus reducing the financing constraints of SMEs
and promoting their innovation (Buchak et al., 2018). However, large listed companies will experience different outcomes. So we
explore how digital financial inclusion initiatives can lead to a decline in the TFP of enterprises using the Financing Constraint (FC)
index as a mediating variable. We refer to the methods of Hadlock and Pierce (2010) and Gu et al. (2020) to establish a model for
measuring the degree of corporate financing constraints. We rank the companies in our sample after dimensionless processing for size,
age, and cash dividends paid. The higher the dimensionless value is, the lower the financing constraint is. Therefore, after all com­
panies are arranged, the 1/3 sample with a smaller value is defined as the high financing constraint group (DFC = 1), and the 1/3
sample with a larger value is defined as the low financing constraint group (DFC = 0). A logit regression is performed according to
model (2) and (3)1. Finally, we fit the probability of occurrence P of financing constraints and define it as the FC index. The larger the
FC, the more serious the financing constraint problem
( ⃒ ) e Zi,t
P DFC = 1 ⃒ Zi,t = (2)
1 + e Zi,t
( ) ( ) ( )
Div NC EBIT
Zi,t = α0 + α1 sizei,t + α2 levi,t + α3 + α4 MTBi,t + α5 + α6 + εi,t (3)
asset i,t asset i,t asset i,t

The regression results in Column (1) of Table 4 show that the development of local digital financial inclusion may aggravate the
financing constraints of listed companies instead of alleviating them. As Columns (2) and (3) show, DFII appears to significantly reduce
the TFP of enterprises by influencing their financing constraints.
Although the development of digital financial inclusion may provide financing assistance to individuals and micro enterprises, the
main service objects are not listed companies with large assets and abundant financing channels. More inclusive financial products
may also affect the flow of social funds, reducing investments directed to listed companies. Financing constraints have a significant
negative effect on the TFP of enterprises, particularly in terms of their free cash flow and patents. Beladi et al. (2021) note that R&D
investment decisions tend to be more conservative and cautious due to cash flow uncertainty, which is not conducive to innovation
efficiency. The financing constraints of firms severely affect their R&D, R&D-intensive firms’ risk also increases with their financial
constraints (Li, 2011; Hall et al., 2016), which affects the total factor productivity of enterprises.
The differences between state-owned and non-state-owned enterprises are evident in China, due to the institutional framework.
State-owned enterprises tend to be larger and have a certain scale advantage in their main business, along with credit endorsements
from local governments, making it easier for them to obtain large credit funds. Thus, state-owned enterprises differ significantly from
those targeted by digital financial inclusion, and thus the effect of digital financial inclusion on them may not be positive and may even
aggravate the financing constraint problem because of the tilting of market funds toward individuals. To confirm the above hypothesis,

1
Size (the natural logarithm of the total assets of a listed company), Lev (total liabilities divided by total assets), Div (cash dividends), MTB
(market-to-book ratio), NC (net working capital), EBIT (earnings before interest and tax).

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Y. Chen et al. Finance Research Letters 47 (2022) 102956

Table 1
Variable definitions.
Variable Definition

DFII (Digital Financial Inclusion
Index)
TFP (total factor productivity)
FC (financing constraints)
Controls
We used the natural logarithm of the digital financial inclusion index as the main explanatory variable, this index is obtained by
the dimensionless processing and weighting of three indexes, the coverage breadth index (data on the scale of Alipay users), the
depth index (scale and frequency of economic activities such as payments, investment, and loans per capita), and the
digitalization degree index (proportion of transactions conducted through digital means).
TFP is total factor productivity of listed companies measured by LP method, TFP(WRDG) is total factor productivity of listed
companies measured by Wooldridge method.
The degree of financing constraint of listed companies is estimated according to formulas (2) and (3). The closer the value is to
1, the more serious the financing constraint of listed companies is.
Leverage (total liabilities divided by total assets), fixed asset intensity (net fixed assets divided by total assets), ROA (profit
divided by total assets), operating profit ratio (operating profit divided by total profit), age (age of listed company), GDP (the
natural logarithm of provincial GDP).

Table 2
The impact of the Digital Financial Inclusion Index on the TFP of listed companies.
(1) (2) (3) (4)
VARIABLES TFP TFP TFP (WRDG) TFP (WRDG)

DFII -0.180*** -0.177*** -0.179*** -0.177***

(0.0481) (0.0462) (0.0489) (0.0457)
Controls NO YES NO YES
Firm FE YES YES YES YES
Year FE YES YES YES YES
Province FE NO YES NO YES
Observations 26,839 26,834 26,839 26,834
R-squared 0.191 0.273 0.196 0.269

The results in Column (1) only control for firm and year fixed effects, while the control variables and province fixed effects are included in Column (2).
In Columns (3) and (4), the explained variables are transformed into TFP calculated using the Wooldridge method. Robust standard errors are re­
ported in parentheses; *** p < 0.01, ** p < 0.05, * p < 0.1

Table 3
Robustness test of the impact of the Digital Financial Inclusion Index on the TFP of listed companies.
(1) (2) (3)
VARIABLES TSLS TFP TFP

DFII -0.226**
(0.113)
DFII(City-level) -0.320*** -0.342***
(0.103) (0.100)
Controls YES YES YES
Firm FE YES YES YES
Year FE YES YES YES
Province FE YES NO NO
City FE NO YES YES
Observations 26,834 25,379 22,327
R-squared 0.273 0.285 0.300

Column (1) is the result of TSLS model with instrumental variables, column (2) changes the explained variables into
municipal DFII, and column (3) excludes the samples in 2020 based on the second column. Robust standard errors are re­
ported in parentheses; *** p < 0.01, ** p < 0.05, * p < 0.1

we define the dummy variable SOE, which is equal to 1 when a listed company is a state-owned enterprise and 0 otherwise.
The regression results in Column (1) of Table 5 show that the cross term of DFII and SOE is significantly negative, indicating that
digital financial inclusion has a negative effect on the productivity of state-owned enterprises. Columns (2) and (4) report our sub­
sequent grouping regressions, showing that the coefficients of DFII are not significant in the subsample of non-state-owned enterprises.
Columns (3) and (5) show that the coefficient of DFII supports the conclusion of the baseline regression for listed state-owned en­
terprises in the sample. Thus, the development of digital financial inclusion has a relatively greater negative impact on state-owned
enterprises than on non-state-owned enterprises.
The development of digital finance will necessarily make enterprise financing more convenient. Regional heterogeneity may
explain why the positive effect cannot be tested in the regression with the full sample. If the development of local finance is uneven,
digital finance may not be fully effective. The functions and effects of financial markets are found to be more evident through the
regional aggregation of finance. Regional financial aggregation may enable financial institutions and related industries to mutually

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Y. Chen et al. Finance Research Letters 47 (2022) 102956

Table 4
Digital financial inclusion leads to changes in TFP by influencing financing constraints.
(1) (2) (3)
VARIABLES FC TFP TFP

DFII 0.116*** -0.083**

(0.0179) (0.0411)
FC -0.734*** -0.730***
(0.0530) (0.0523)
Controls YES YES YES
Firm FE YES YES YES
Year FE YES YES YES
Province FE YES YES YES
Observations 26,235 26,054 26,054
R-squared 0.200 0.321 0.322

Column (1) shows the influence of DFII on financial constraint, column (2) shows the influence of financing constraint on
TFP of the firms, and column (3) shows the influence of DFII and financing constraint on TFP when both are used as
explanatory variables. Robust standard errors are reported in parentheses; *** p < 0.01, ** p < 0.05, * p < 0.1

Table 5
The impact of digital financial inclusion on the TFP and financing constraints of listed companies with different property rights.
(1) (2) (3) (4) (5)
VARIABLES TFP TFP (SOE = 0) TFP (SOE = 1) FC (SOE = 0) FC (SOE = 1)

DFII × SOE -0.110***

(0.018)
DFII -0.066 -0.105 -0.132** 0.068 0.056***
(0.047) (0.065) (0.058) (0.099) (0.018)
SOE 0.590***
(0.104)
Controls YES YES YES YES YES
Firm FE YES YES YES YES YES
Year FE YES YES YES YES YES
Province FE YES YES YES YES YES
Observations 25,818 15,873 9,630 15,435 9,495
R-squared 0.279 0.349 0.222 0.264 0.202
Number of firms 3,202 2,205 1,172 2,207 1,173

Column (1) shows the results of the model with the SOE and DFII cross term added, columns (2) and (4) show the results of the non-state-owned
enterprise sample, and columns (3) and (5) show the results of the state-owned enterprise sample. Robust standard errors are reported in paren­
theses; *** p < 0.01, ** p < 0.05, * p < 0.1

make use of shared infrastructure and network systems, improve the efficiency of financing utilization, and accelerate the transfer of
production factors to high-efficiency industries, thus promoting economic growth (Greenwood and Jovanovic,1990; King and Lev­
ine1993; Levine, 1998). Thus, digital financial inclusion can have a completely different effect in developed areas where financial
institutions are concentrated compared with developing cities.
Most of China’s financial resources are concentrated in the four developed cities of Beijing, Shanghai, Guangzhou, and Shenzhen.
We therefore separate these four cities from the full sample and conduct a group regression comparison with other cities. The results in
Column (2) of Table 6 show that digital financial inclusion has an extremely positive effect in these four cities, significantly promoting
the TFP of listed companies. In addition, the regression results in Column (4) show that the strengthening effect of digital financial
inclusion development on financing constraints in the full sample is not reflected in the subsample with the four major cities. This
indicates that the development of digital finance has not increased the financing constraints of listed companies in these cities, which
may be related to the level of market capital in Beijing, Shanghai, Guangzhou, and Shenzhen, and the degree of financial system
development. These megacities are way ahead in financial terms, and their levels of capital, financing channels, supporting facilities,
and management capacity are far higher than in other cities. Digital finance can thus play a central role in these cities, as it can produce
positive effects on the upstream and downstream financing of their supply chains. Other cities have limited financial resources,
infrastructure, and regulatory conditions, so the advantages of digital financial inclusion may not be fully reflected, and its devel­
opment may lead to more capital flowing to individuals.

4. Conclusion

Through our empirical research, we find that the development of local digital financial inclusion has an inhibitory effect on listed
companies’ TFP and is unable to alleviate their financing constraints. The direct beneficiaries of digital financial inclusion are not listed
companies with huge assets. We find this negative effect to be more significant in state-owned enterprises, but not in a separate sample
of non-state-owned enterprises. However, in megacities with good financial infrastructure such as Beijing, Shanghai, Guangzhou, and

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Table 6
The impact of digital financial inclusion on the TFP and financing constraints of listed companies in different regions.
(1) (2) (3) (4)
VARIABLES TFP (Other cities) TFP (Four major cities) FC (Other cities) FC (Four major cities)

DFII -0.135*** 1.724** 0.084*** -0.302

(0.050) (0.802) (0.017) (0.221)
Controls YES YES YES YES
Firm FE YES YES YES YES
Year FE YES YES YES YES
Province FE YES YES YES YES
Observations 19,592 7,242 19,123 7,112
R-squared 0.296 0.253 0.265 0.203

Columns (1) and (3) show the results of the sample whose listed companies are located in cities other than Beijing, Shanghai, Guangzhou and
Shenzhen, and columns (2) and (4) show the results of the sample whose listed companies are located in Beijing, Shanghai, Guangzhou and Shenzhen.
Robust standard errors are reported in parentheses; *** p < 0.01, ** p < 0.05, * p < 0.1

Shenzhen, digital financial inclusion can greatly increase the TFP of listed companies, which indicates that such inclusion needs a solid
urban foundation and market to fully reflect its positive effect. Transmitting this positive influence to listed companies in cities with
underdeveloped financial bases is challenging. Thus, policy makers should not only consider the scale but also the quality of digital
financial inclusion. The development of local digital financial inclusion should match the overall development of local financial
markets and strengthen the synergistic effect of the financial system. Only high-quality digital financial systems can have a significant
positive impact on enterprises at all market levels.

CRediT authorship contribution statement

Yang Chen: Methodology, Software, Data curation, Writing – original draft. Shengping Yang: Formal analysis, Methodology,
Writing – review & editing, Writing – original draft. Quan Li: Conceptualization, Supervision, Writing – review & editing.

Declaration of Competing Interest

None.

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