The nexus between digital finance and economic development: Evidence from China

Abstract

In the context of the digital economy and based on the characteristics of digital financial development in China, this paper investigates the effect of digital finance on economic growth and explores its influencing mechanism. A panel econometric model, mediating effect model, and instrumental variable method were employed to evaluate yearly data from 30 provinces of China from 2011 to 2018. The results show that the development of digital finance has significantly driven economic growth, which is quantitatively robust after the selection of historical data as instrumental variables and other robustness tests. A heterogeneity analysis proved that provinces in the central and western regions, which have a lower urbanization rate and lower physical capital, more clearly embody the facilitating impacts of digital finance on economic growth compared to their counterparts in other regions. Further analysis found that the development of digital finance has spurred the liberation of regional entrepreneurship, which in turn promoted economic growth—that is, there is an entrepreneurial channel by which digital finance could boost economic growth.