Can digitalization of inclusive finance promote innovation of small and medium-sized enterprises? A quasi-natural experiment approach

Abstract

As small and medium-sized enterprises (SMEs) often struggle with financing constraints, understanding how digital inclusive finance (DIF) can support their innovation efforts is critical. We apply a rigorous econometric approach to estimate the causal impact of digital finance on SME innovation. The findings demonstrate two key results. First, the digitalization of inclusive finance can significantly promote technological innovation in SMEs by mitigating financing constraints, with particularly strong effects on low-level innovations such as design patents. Second, the broad reach of digital finance services plays a critical role in reducing financing constraints. These findings offer actionable insights for policymakers and financial institutions aiming to support SME innovation by enhancing access to digital financial services. Finally, this research contributes to the growing body of evidence on how digital finance can strategically enhance SME innovation under financing constraints.