Emerging Tech

Bank Size Or Distance: What Hampers Innovation Adoption By SMEs?

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Executive Summary

A growing body of research is focusing on banking organizational issues, emphasizing the difficulties encountered by hierarchically organized banks in lending to informationally opaque borrowers. While the two extreme cases of hierarchical and non-hierarchical organizations are typically contrasted, what shapes the degree of hierarchy and how to measure it remain fairly vague. In this paper the authors compare bank size and distance between a bank's branches and headquarter as possible sources of organizational frictions, by studying their impact on small firms' likelihood of introducing innovations. Results show that SMEs located in provinces where the local banking system is functionally distant are less inclined to introduce innovations, while the market share of large banks is only slightly correlated with firms' propensity to innovate.

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