Digitalization, financial inclusion, and small and medium-sized enterprise financing: Evidence from China

Abstract

This study investigates the impact of a new digitalization policy implemented in seven pilot zones in China on small and medium-sized enterprises (SMEs) and their access to finance. Given the limited evidence on how digitalization promotes financial inclusion, we employ a quasi-natural experiment approach to assess its effects. Our findings demonstrate that digitalization is more effective than traditional approaches in alleviating SMEs' financing constraints and enhancing financial inclusion. Specifically, the utilization of digital financial services, such as payment, money funds, credit, insurance, and investment, plays a crucial role in mitigating information asymmetry and facilitating SMEs' access to finance. These results provide support for the ongoing digital transformation of SMEs and financial institutions, emphasizing the significance of information-bearing through digital channels.