Short-term loans and Firms' high-quality innovation: Evidence from the access to patent-backed loans in China

When obtaining short-term loans, an innovative firm tends to expand its production scale, thereby reallocating its R&D-related resources away from innovation. By exploiting the unique situation in China that patenting firms for the first time obtained short-term patent-backed loans (PBLs), we find that the PBL access negatively influences firms' propensities of producing high-quality innovation. Consistent with the R&D resource reallocation hypothesis, we find that this negative effect exists only among firms initially having invention patents; it is more pronounced when the PBL covers a larger portion of firm investment and when these firms expand more aggressively. We confirm the scale expansion effect by finding that the PBL access positively influences firms' subsequent size.