Financial geographic structure and innovation quality: Evidence from Chinese firms amid economic policy uncertainty

In countries where indirect financing dominates, the geographic distribution of financial resources to firms is crucial in enhancing credit availability and improving innovation quality. This study examines the impact and heterogeneity of financial geographic structure on firm innovation quality. Using the number of bank branches surrounding Chinese listed companies as a proxy for financial geographic structure, we employ a multidimensional fixed effects model and Heckman's two-stage method, finding that a higher density of bank branches significantly enhances firms’ access to credit. This fosters innovation by increasing invention patent applications in high-tech non-state-owned enterprises and green patent applications in non-high-tech state-owned enterprises. However, as economic policy uncertainty increases, the positive effect of financial geographic structure on firm innovation diminishes. Hence, countries facing substantial policy uncertainty and relying on indirect financing must strengthen multilevel financial markets and encourage commercial banks to provide greater support for firms pursuing higher levels of innovation.