DIPARTIMENTO DI ECONOMIA Bank Size or Distance: What Hampers Innovation Adoption by SMEs?

A growing body of research focuses on banking organizational issues, emphasizing the difficulties encountered by hierarchically organized banks in lending to borrowers/projects with high intensity of soft information. However, as the two extreme cases of hierarchical and non–hierarchical organizations are typically contrasted, what actually shapes the degree of hierarchy and how to measure it remain fairly vague. In this paper we compare bank size and distance between bank’s branches and headquarter as possible sources of organizational frictions. In particular, we study the impact of distance and bank size on the firms’ likelihood of introducing innovations and financing constraints on a sample of Italian SMEs. Our results show that firms located in provinces where the local banking system is functionally distant are less inclined to introduce innovations and are more likely to be credit rationed. Conversely, we find that the market share of large banks is only rarely statistically significant and when it is, the economic impact on the probability of introducing innovation and credit rationing is appreciably smaller than that of functional distance.