Does innovation credit reduce informal finance? Evidence from China

Purpose This paper aims to investigate how innovation-oriented credit policies affect firm financing behavior in emerging economies, using China’s Promote Sci-Tech and Finance Integration initiative as a quasi-natural experiment. Design/methodology/approach Using an unbalanced panel of Chinese A-share firms from 2006 to 2020, this study estimates the policy effect with a staggered difference-in-differences (DID) design. Findings Rather than reducing reliance on informal finance, the policy led to increased use of trade credit, as subsidized loans were diverted along supply chains through receivables and prepayments. The effect is most pronounced among politically unconnected and non-high-tech firms, suggesting a strategic adaptation to credit incentives. Further analysis shows that firms engaged in research and development (R&D) reporting manipulation are more likely to channel funds toward short-term financial intermediation. Originality/value These findings highlight how institutional capacity, rather than credit availability alone, determines the success of financial reforms. The study offers broader implications for policy design across Asia-Pacific economies seeking to foster innovation through credit-based interventions.