1. Introduction
Since the reform and opening-up, China’s GDP has grown by an average of 9.4% per year, with the country quickly becoming the world’s second-largest economy—a phenomenon known as the “Chinese miracle” [
1]. By 2020, China’s surveyed unemployment rate was below 5.3%, the per capita disposable income of residents exceeded 4348 USD, and China had lifted 11.09 million rural people out of poverty over the previous year and turned into a middle- to upper-income country [
2]. Confronted with a series of internal and external factors, including the risk of the “middle-income trap,” the in-depth adjustment of the international economic structure, and so forth, China’s economic growth has slowed down, and economic development is now in the situation of the “new normal” [
3]. How to shift the economic growth pattern from over-reliance on investment to that driven by entrepreneurship and innovation is a major issue in the sustainable development of China. Meanwhile, the digital economy is the most active field in China’s economic development, and one of its major features is that it is based on a new financial system supported by information technology, so it continues to expand into various economic and social fields, playing an important role in stimulating consumption, encouraging investment, and job creation. Cultivating new kinetic energy with informatization, driving the mode of production through digital transformation, and unleashing the power of the digital economy to build a “Digital China” are important elements in China’s quest to achieve sustainable and sound development.
Economic development cannot be separated from the support of finance, which is an inextricable part of the process of growth [
4]. In recent years, with the in-depth integration of information technology and finance, digital finance—a new financial model—has gradually become an indispensable dimension of China’s financial system; it is conducive to the advancement of conventional financial sectors and institutions, realizing the transformation of financial business from being credit- and collateral-based to being data-based [
5]. For example, the Internet of Things generates a wealth of data; artificial intelligence and cloud computing improve the efficiency of data processing; big data provide timely feedbacks and are promising for reshaping and re-engineering business models [
6], and blockchain facilitates the updating and real-time dissemination of data. Besides, digital applications are cheaper and may allow for timely cost reduction [
7]. Existing studies have argued that digital finance, involving digital financial services and products such as online credit, mobile payment, digital crowdfunding, e-commerce supply chain finance, etc., has a multidimensional and compound impact on economic performance. On the one hand, the emergence and popularization of the Internet and other innovative technologies can form an economic environment covering economies of scale, economies of scope, and the long tail effect, which is conducive to realizing the transformation of traditional models of credit business, matching supply and demand across geographical boundaries and thus introducing a better pricing system to achieve economic equilibrium [
8]. On the other hand, a closer association between the Internet and the financial industry has created a new development ecology [
9,
10], broadening the financing channels for small and medium-sized enterprises and vulnerable groups, lowering the threshold of financial services, improving the convenience of funding, and thus causing economic activities to prosper. According to the Digital Financial Inclusion Index released by Peking University [
11], from 2011 to 2018, the average value of the index increased from 40.00 to 300.21, indicating that digital-inclusive finance is booming in China. However, to what extent does digital finance affect economic growth and through what path? Is the effect of digital finance on economic growth heterogeneous, owing to differences in geographic location and factor endowments? This paper endeavors to answer these questions. Originating from Schumpeter’s innovation and endogenous growth theory [
12,
13], entrepreneurship, the mechanism of “creative destruction”, formed based on innovation activities, plays an enabling role in pushing forward technological progress, promoting economic structural adjustment and endogenous economic growth. Therefore, this paper attempts to explore the influencing mechanism of digital finance on economic growth from the perspective of entrepreneurship. The research in this paper not only helps us to thoroughly understand the impact of digital finance on China’s economic growth but also provides experience and a reference for developing countries and emerging economies.
Specifically, based on the digital inclusive finance index released by Peking University and China’s provincial panel data from 2011 to 2018, combined with the characteristics and unique attributes of digital finance, this paper examines the nexus between digital finance and economic growth as well as its heterogeneous impact, and further explores its influencing mechanism. Moreover, the historical data on the number of fixed-line telephones and per capita post and telecommunications businesses in each province in 1984 were selected as instrumental variables to palliate the effects of endogeneity, and other robustness checks were also carried out. It turns out that digital finance has significantly promoted economic growth, especially in China’s central and western regions and areas with a lower urbanization rate and lower physical capital, in comparison with their counterparts in other areas. Further research shows that entrepreneurship is an intermediary variable that enhances the positive impact of digital finance on economic growth.
The contribution of this paper lies in the following aspects. Firstly, drawing on the existing literature, in the context of China’s vigorous development of digital economy, this paper examines the nexus between digital finance and economic growth at a macro level and reports the nuanced heterogeneous influence in terms of geographic location and the level of urbanization development and physical capital. This not only deepens our understanding of the construction of a “Digital China,” but also enriches the literature on digital finance. Secondly, in considering the fundamental issue of how digital finance influences economic development, a mediation effect model is adopted to further evaluate the strengthening effect of entrepreneurship on the path by which digital finance affects economic growth; this deepens the existing literature. Thirdly, taking into account the entrepreneurial spirit of innovation, pioneer spirit, and risk-taking, we establish a composite index to proxy entrepreneurship, which could embody the connotation and characteristics of entrepreneurship more accurately and comprehensively than previous studies. Additionally, this paper employs historical data as instrumental variables to control endogeneity, which increases the robustness of the main conclusions.
The remainder of the paper is arranged as follows.
Section 2 is devoted to a literature review.
Section 3 introduces models, gives a description of the data, and conducts a preliminary investigation.
Section 4 presents and interprets the results.
Section 5 concludes the paper and provides relevant policy implications.
2. Literature Review
There is a broad consensus that financial development conduces to economic growth for academics and practitioners [
14,
15]. The core function of finance is to optimize the allocation of resources while reducing risks as much as possible. Relevant empirical findings showed that financial development helps to manage risks, decrease external financing costs [
14], encourage consumption [
16,
17], reduce liquidity constraints, and facilitate transactions [
18]. The nexus between financial systems (in respect of financial deepening) and growth remains arguable. Schumpeter [
19] underlined the fact that a banking system plays an essential role in economic growth. Levine [
15] verified that the banking system, as a robust and solid financial intermediation system [
20], could effectively alleviate the external financing constraints of enterprises, thereby leading to long-term economic growth and productivity improvement. In general, these arguments affirmed the relationship between financial investment and growth.
However, the development of China’s financial system is still far from impeccable, which has seriously inhibited sustainable economic growth [
21,
22]. The phenomenon of financial repression is widespread in developing countries and emerging economies [
23,
24], manifesting in restrictions on deposit and loan interest rates and supervision to capital accounts [
25], and China is no exception. China’s traditional financial system is dominated by banks, which carry out business on the basis of credits and collaterals. Rigorous risk control and management have led to difficulties in gaining access to financial services for small-, medium-, and micro-sized enterprises, which puts them at a disadvantage. Moreover, the banking sector in China is mainly dominated by state ownership [
26]; thus, interest rates and credit allocation are heavily affected by political factors, leading to market failures. Furthermore, there are inefficiencies and distortions in the traditional financial system, embodied in many aspects such as inadequate competition of commercial banks, resulting in excessive profits and insufficient rural financial supply. Financing constraints, such as difficult and expensive financing, have restrained the sustainable and healthy development of China’s economy, and also promote the vigorous development of digital finance as a new financial model in China [
27].
In recent years, digital finance, relying on innovative technologies such as information technology, big data technology, and cloud computing, has provided a huge scope for development to reduce financial transaction costs, tap into the potential demand of users, and expand the scope and accessibility of financial services [
28,
29]. For traditional financial sectors such as banks, digital finance is promising to lower costs by reducing queues in banks, minimizing paperwork and documentation, and requiring fewer branches and physical outlets [
30]. For the financial and monetary supervision departments, digital finance is instrumental to reducing the quantity of physical cash in circulation and helps to curb high inflation in developing and poverty-stricken countries [
31]. With regard to enterprises and individuals, digital finance has enriched the channels of financing and credits, simplified transaction procedures, and promoted the availability and convenience of financial services [
32,
33]. As a new financial model, digital finance has become a powerful complement to the traditional financial system, affecting many aspects of economic performance.
The existing literature links digital finance and growth, directly or indirectly, to issues such as traditional financial market, financing, household consumption, gender equality, and poverty reduction. To this end, a review of digital finance and issues related to growth and economic performance is presented. In terms of the traditional financial market, the emergence and evolution of digital finance urges the transformation of incumbent providers of banking business and financial services, and thus diversified, cost-efficient, and intelligent financial products and services are required to reach new levels of user-centricity [
5,
34]. Research shows that information asymmetry, a lack of sufficient collateral, and higher borrowing costs are the main reasons why micro-, small-, and medium-sized enterprises (MSMEs) face greater financing constraints compared with big businesses. Incorporating asset-backed bonds into the blockchain to increase transparency, automating cumbersome processes, and opting for loans from innovative digital platforms such as digital crowdfunding and peer-to-peer platforms, can lower financing barriers and costs and improve the efficiency and accessibility of financial services for MSMEs [
35,
36]. As far as household economics and consumption go, Grossman and Tarazi pointed out that the prevalence of digital financial services makes it easier and more convenient for smallholder farming families to save, borrow, and manage income and assets. With the continuous expansion of the digital ecosystem, such as more mobile phones and greater network coverage, digital finance will bring about more convenience and support for peasant households [
37]. Based on an empirical analysis in China, Li found that digital finance could boost household consumption by improving the convenience of borrowing, reducing liquidity constraints, and broadening the investment channels [
38]. When it comes to gender equality, Kromidha [
39] and Kusimba [
40], in the context of India and Kenya, respectively, focused on the nexus of digital financial services and products, such as digital crowdfunding, smartphones, digital credit services, etc., and how they affect women’s access to finance and gender equality in entrepreneurship. As to poverty alleviation, Ozili argued that digital finance plays a beneficial role in financial inclusion and stability [
41], but when providing digital financial services to the poor, government intervention may be required to reduce the risks of the digital financial system, so as to achieve the dissemination of digital financial services for the poor [
42].
On the grounds of the above arguments, it is clear that digital finance, as an indispensable part of the traditional financial market, has penetrated deep into almost all aspects of the economy. Its innovative advancements in terms of Internet financing and insurance, mobile payment, digital crowdfunding, and online credit can advance the infiltration of financial services, granting access to financial services to entrepreneurs, easing the financial pressure on enterprises, and thus prompting economic development. Notwithstanding, empirical studies that accurately assess the role of the digital economy in economic growth are scarce, especially in the context of China’s digital economy. Therefore, this paper investigates the possible impact of digital finance on economic growth based on several dimensions of digital finance and explores its potential influencing mechanisms.
5. Conclusions and Policy Implications
President Xi Jinping pointed out that when financial systems are vibrant and stable, so is the economy. As a representative of the new financial development models, digital finance is of great significance for China to achieve high-quality development through the construction of a digital economy. On account of the fact that digital finance has greatly affected China’s economic performance, from the perspective of entrepreneurship and using the yearly data of 30 provinces in China, we first carried out a preliminary investigation, and then adopted the panel econometric model and mediating effect model to conduct multidimensional empirical analyses to explore the influencing mechanism of digital finance on economic growth. The main conclusions are as follows: First, digital finance has a positive and significant impact on economic growth and has become an important driving force for high-quality development in China in the digital era. Through the introduction of instrumental variables and other robustness tests, this conclusion was validated. Three subindicators: coverage breadth, usage depth, and digitalization level, all had a significantly positive effect on economic performance. Second, drawing on the heterogeneity analysis, the central and western regions, areas with lower urbanization level and lower physical capital, played a greater marginal role in digital finance and enjoyed a higher dividend of digital finance compared to their counterparts—that is, digital finance had a greater promoting effect on the economic development of underdeveloped regions, verifying the inclusiveness of digital finance. Third, entrepreneurship was a mechanism of digital finance, enabling economic growth. The two-wheel driving phenomenon formed by the “Internet +” and “the nationwide initiative spurring entrepreneurship and innovation” is of great significance for bolstering China’s economy. In light of these results, relevant policy implications and practical inferences are presented below.
Firstly, based on the reality that digital finance has become a new driving force for economic growth, advanced technologies such as big data, cloud computing, blockchain, artificial intelligence, etc., should be further applied to aid the continuous development of digital finance. Specifically, the government should take steps to expand the coverage breadth and usage depth and to tap the functions of digital finance to advance the construction of a digital China and further consolidate the dividends brought about by digital finance, with information technology as its carrier. Secondly, the positive effect of digital finance on underdeveloped areas still needs to be strengthened, indicating that dynamic and differentiated digital financial measures should be implemented to make digital finance become the “hardware” technical support to effectively mitigate the imbalance of regional development and achieve inclusiveness. Policymakers should expand accessibility and maintain the stability of digital finances to help vulnerable and economically marginalized segments of the country address difficulties in financing. For instance, in the central and western regions, where the coverage of traditional financial outlets is relatively low, Internet technology could be used to expand the financing channels to reduce the transaction costs and facilitate financing. Finally, digital finance brings an endogenous impetus to regional economic development by inspiring entrepreneurship, testifying that Internet technology and financial services can converge to create a new momentum for economic development through entrepreneurship, which is indispensable for economic growth in the new era. Therefore, it is necessary to strengthen the incentive role of innovation and entrepreneurship, and accelerate the protection and liberation of outstanding entrepreneurship, to ensure the optimal allocation of limited credit resources.