International Review of Financial Analysis 78 (2021) 101889

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International Review of Financial Analysis

journal homepage: www.elsevier.com/locate/irfa

Can digital financial inclusion promote China's economic growth?

Yang Liu b, 1, Lin Luan c, 1, Weilong Wu a, *, 1, Zhiqiang Zhang d, Yen Hsu e
a
School of Film Television & Communication, Xiamen University of Technology, Xiamen, China
b
Southwestern University of Finance and Economics, Chengdu, China
c
College of Marxism, Dongbei University of Finance and Economics, Dalian, China
d
Postdoctoral Research Station, China Export and Credit Insurance Corporation, Beijing, China
e
The Graduate Institute of Design Science, Tatung University, Taipei，Taiwan，China

A R T I C L E I N F O A B S T R A C T

Keywords: Can digital financial inclusion as an emerging and innovative financial service promote economic growth? Based
Digital financial inclusion on a Bayesian macroeconomic analysis framework, this paper introduces the level of Internet development as a
Economic growth threshold variable, analyzes the impact of digital financial inclusion on economic growth based on provincial
Threshold regression model
panel data from 2011 to 2019 in China, and finally explores the mediating effect of digital financial inclusion on
Multiple intermediary models
economic growth through a multiple mediation model. The results show that ① digital financial inclusion
development has a significant contribution to economic growth. ② The impact of digital financial inclusion
development on economic growth has a significant Internet threshold effect. ③Promoting small and medium-
sized enterprise entrepreneurship and stimulating residents' consumption are two important channels through
which digital financial inclusion development affects economic growth.

1. Introduction beginning of the 21st century.

Since digital financial inclusion (DFI) is a relatively new concept in
China, this paper first summarizes the fundamental connotations and
framework of DFI and the nature of its development internationally and
in China.
A more consistent understanding of the definition of DFI at present is
the following concept put forward in 2005 by the United Nations and the
World Bank in the promotion of “International Year of Microcredit”: to
“ensure that everyone enjoys timely, dignified, convenient, high-quality
financial services at a right price when they have financial demand.” The
practice of inclusive finance has experienced a long period of historical
development and has undergone many changes in its development. The
earliest method of inclusive finance can be traced to the pawnshops set
up by the Italian Catholic Church in the 15th century, which made it
possible for the poor in the community to obtain loans (The World Bank,
2011). From the 1970s to the 1990s, modern microcredit developed
further and gradually expanded to achieve broad coverage, and projects
and organizations providing microloans to women appeared, such as the
Grameen Bank in Bangladesh, ACCION International in Latin America,
and the Bank of Self-Employed Women's Associations (SEWA) in India.
Finally, modern microfinance began to take shape from the 1990s to the
On the one hand, microfinance was developing into comprehensive
financial services; on the other hand, more institutions were involved in
microfinance business and services (Ault & Joshua, 2016). Since the 21st
century, Internet and mobile Internet technology development have
provided opportunities for the comprehensive development of inclusive
finance. For example, providing financial services by mobile phones has
become a growing trend in some Sub-Saharan African countries.
Compared to traditional financial services, the frequency and conve­
nience of such transactions have improved due to the adoption of mobile
phone services. The adoption of mobile financial services increases the
likelihood of saving and has a positive impact on the amount of savings
(Ouma, Odongo, & Were, 2017). Some scholars have since successively
discussed the positive effects of DFI on economic growth and govern­
ment governance and pointed out the existing problems so that DFI can
better serve developing countries and emerging economies (Ozili,
2018).
The more authoritative concept and framework of DFI come from the
World Bank. DFI is a digital approach that promotes information
sharing, effectively reduces the transaction costs and threshold of
financial services, and expands the scope of financial services and
coverage through the application of Internet technology with the help of

* Corresponding author.
E-mail address: wu_edu@yeah.net (W. Wu).
1
These authors contributed equally to this study.

https://doi.org/10.1016/j.irfa.2021.101889
Received 15 July 2020; Received in revised form 5 August 2021; Accepted 13 September 2021
Available online 22 September 2021
1057-5219/© 2021 Elsevier Inc. All rights reserved.
Y. Liu et al.
computer information processing, data communication, extensive data
analysis, cloud computing and a series of related technologies in the
financial field. DFI builds risk control systems based on data with the
advantages of digital finance sharing, convenience, and security at low
cost and low thresholds using big data, cloud computing, and artificial
intelligence technologies, thus comprehensively improving the risk
control of finance. DFI reflects the original intentions and goals of fin­
tech to allow those who have long been excluded by modern financial
services access to formal financial services (GPFI, 2017; Izaguirre,
Lyman, Mcguire, & Grace, 2016; The World Bank, 2018). The majority
view is that DFI focuses on providing high-quality and appropriate
financial products and services to those who are in urgent need but have
no access to financial services and that digital technology should be
utilized to achieve this goal when possible. Groups lacking financial
services (which usually include the poor, women, young people, people
from rural regions, and minorities) should be given more attention as
well as vulnerable groups such as immigrants, the elderly, and the
disabled (Neaime & Gaysset, 2018; Park & Mercado, 2018).
Both internationally and in China, inclusive finance has gradually
developed conceptually, theoretically, and in practice from focusing on
the availability of banks' physical outlets and credit services to covering
a wide range of business fields such as payment, deposits, loans, insur­
ance, credit services, and securities. On a practical level, the practice of
inclusive finance in China has gradually expanded from a focus on
nonprofit microcredit to comprehensive financial services for payment,
credit and multiple other businesses, considerably progressing with the
help of the broad application of Internet mobile communication tech­
nologies. At present, inclusive finance in China shows a strong correla­
tion with innovative digital finance in practice. The new digital financial
business represented by Internet technology enterprises providing
financial services can reduce the cost of financial service products and
expand the coverage of financial services through information technol­
ogy and product innovation. Therefore, the new digital economic model
has become an essential source of power and growth for inclusive
finance. Specifically, from the perspective of coverage, traditional
financial services require improving coverage by establishing outlets.
Still, the high cost makes it difficult for traditional financial services to
popularize into relatively backward regions. However, the cross-border
integration of digital technology and financial services has overcome
this disadvantage. In some areas with no hardware facilities such as
bank outlets or ATMs, customers can still obtain the financial assistance
they need through terminal devices such as computers and mobile
phones.
In contrast to settings in which the primary resources of traditional
financial institutions are distributed across the population- and business-
concentrated regions, digital finance makes financial services more
direct and covers a broader range of customers. In terms of social groups
covered, the product innovation of digital finance has lowered the
threshold of customer access, greatly accelerating the popularization of
financial services. Moreover, compared with the exclusivity of tradi­
tional financial institutions, digital finance can satisfy small, medium-
sized, and microenterprises and people with low incomes who are usu­
ally unable to enjoy financial services, reflecting the due meaning of
inclusive finance.
Notably, Internet finance, as the new financial business model of
“Internet + financial” services, has become a center for capital in recent
years. Although DFI also innovates the traditional financial service mode
by using emerging digital technologies such as big data and cloud
computing, it differs from Internet financial technology. Internet finance
emphasizes Internet enterprises engaging in financial business, while
DFI highlights the characteristics of digital technology, expanding and
deepening the combination of traditional inclusive finance and Internet
finance. Compared to the former two, DFI covers a broader range and
has more digital technology dividends in reducing customer acquisition
and service costs, broadening the coverage of financial services,
strengthening risk control, and improving user experiences. As a result,
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International Review of Financial Analysis 78 (2021) 101889
some people believe that DFI, as a new mode of inclusive finance
development, can lead to the sustainable development of inclusive
finance and promote economic growth, especially in developing coun­
tries and emerging economies.
In 2005, the United Nations and World Bank first proposed the new
concept of inclusive finance at the International Microfinance Annual
Conference as a financial system that can systematically and effectively
provide comprehensive services to all classes and groups of society
(Kshetri, 2020; Mader, 2016; Marshall, Weihs, Larkey, Badger, & García,
2011). The core of inclusive finance is to continuously improve the
availability of financial services through vigorous development and the
improvement of economic infrastructure so that timely and efficient
financial assistance can be extended to the entire social group with a
focus on underdeveloped areas and providing low-cost financial services
at an affordable cost. Since 2006, China has vigorously promoted the
development of inclusive finance and adopted a series of measures,
including establishing village banks, microfinance companies, and in­
clusive finance business units in large and medium-sized banks.
Although the inclusive finance business has accomplished many
achievements in serving long-tail customers such as small and medium-
sized enterprises, urban low-income groups, and farmers in recent years,
problems related to low business-coverage, low single-family yields, and
poor risk control have also greatly hindered the sustainable develop­
ment of inclusive financial services.
With the rapid development of the Internet, relying on emerging
digital technologies such as big data and cloud computing, digital
financial inclusion has also made significant progress (Fungácová &
Weill, 2014; Shen, Hueng, & Hu, 2020; Xiong, Turvey, & Li, 2013). The
current practice of inclusive finance in China has a strong correlation
with innovative digital finance. Internet companies have vigorously
developed new digital financial services such as online lending, and
their potential target customers are socially disadvantaged groups that
are difficult to cover with traditional financial institutions. Digital
technology innovates conventional financial services and products,
dramatically reduces the cost of acquiring financial services and prod­
ucts, expands the coverage of financial services and products, and ach­
ieves mutual benefits for enterprises and customers. In September 2016,
at the Hangzhou G20 International Summit, China, as the chair country,
put forward a proposal for the development of digital financial inclusion
and coordinated with participating countries to formulate the “G20
Digital financial inclusion Advanced Principles” advocating the use of
digital technology to promote the development of inclusive finance to
enable the most disadvantaged groups of society to enjoy convenient
and effective financial services (Damodaran, 2015). Therefore, the low
threshold, low cost, high efficiency, and convenience of innovative
digital financial inclusion have made it an essential driving force behind
the current development of inclusive finance in China.
Currently, China's economic development has comprehensively
entered a new normal stage. With economic growth turning to high-
quality systems and digitalization, new methods must be developed to
enhance the capacity of financial services for the real economy. As a
result, digital financial inclusion has become an inevitable trend in the
development of inclusive finance. In this context, it is essential to sys­
tematically and objectively explore the impact of digital financial in­
clusion development on economic growth. However, due to the short
story of digital financial inclusion, there is a lack of relevant research on
the impact of digital financial inclusion on economic growth and related
mechanisms. Therefore, this article takes this focus as its research sub­
ject and conducts an in-depth analysis of theoretical and empirical
perspectives.
Many studies have verified the influence of inclusive finance devel­
opment on economic growth, and most scholars believe that the devel­
opment of inclusive finance can promote economic growth. However,
DFI is a relatively new concept. Studies on its effect on economic growth,
especially in developing countries, are limited and must be completed in
theory and practice. How DFI can be best used to promote economic
Y. Liu et al.
growth is another issue that policy makers must consider and the focus
of this paper. The main contributions of this paper are as follows.
From the theoretical level, this paper inductively analyzes the in­
fluence mechanism of digital financial inclusion on economic growth
from different perspectives, providing some theoretical basis for the
empirical analysis, and empirically examines the linear and nonlinear
relationships between digital financial inclusion and economic growth
using Bayesian Vector Auto Regressive model, threshold regression and
mediation effect analysis, and tests the influence mechanism. A correct
understanding of the relationship between digital financial inclusion
and economic growth can enrich the theoretical system related to the
development of digital financial inclusion affecting economic growth
and provide a specific reference for future research in related fields.
There is considerable research on the influence of traditional inclu­
sive finance on economic growth at a practical level. Still, modes of DFI
development differ significantly from conventional inclusive finance,
and few studies on its relationship to economic growth. Through theo­
retical and empirical analysis of the influence of DFI on economic
growth, this paper provides adequate academic support for policy
makers and relevant practitioners to formulate corresponding policies to
promote the sustainable development of DFI and then promote eco­
nomic growth. The results show that (1) DFI development significantly
promotes economic growth at national and regional levels. The sup­
portive effect of DFI development is considerably more significant in
eastern China than in central and western China. (2) DFI development
has a significant threshold effect on economic growth. The higher the
level of Internet development, the stronger the effect of DFI on economic
growth. (3) Promoting the entrepreneurship of small and medium-sized
enterprises and stimulating resident consumption are two important
channels through which DFI development affects economic growth.
This paper proceeds in the following order. The first section provides
a literature review. The second section presents a mechanism analysis of
the influence of DFI development on economic growth. The third section
provides an empirical analysis of the impact of the development of
digital financial inclusion on economic growth. The fourth section out­
lines a mechanism test of the power of DFI development on economic
growth. Finally, the area is concluded and.
2. Literature review
With the introduction of the concept of inclusive finance, the rela­
tionship between the development of inclusive finance and economic
growth has become a research focus among scholars in recent years. The
main barrier to studying the relationship between the two variables
involves building a sound indicator system to measure the development
of inclusive finance. However, because inclusive finance covers a wide
range of financial services, including credit, payment, insurance, and
other fields, different scholars have adopted quite different methods for
measuring the development of inclusive finance. Numerous studies have
borrowed from the five perspectives of penetration, convenience,
availability, usability, and cost. They have used human development
index measurement methods while considering the supply and demand
of financial services and selecting indicators to build an inclusive eco­
nomic evaluation index system (Gupte, Venkataramani, & Gupta, 2012;
Kendall, Mylenko, & Ponce, 2010; Ndesaulwa & Kikula, 2016; Sarma &
Pais, 2011). Most domestic scholars have learned from related foreign
research and made improvements according to the specific domestic
conditions concerned. For example, one work used six indicators from
data on China's banking industry and the coefficient of variation to
measure the development of inclusive finance in China from 2002 to
2011 (Wang Jing, 2013). Another work applied the evaluation index
system issued by the Global Inclusive Finance Partnership (GPFI) to
China's national conditions with indicators such as farmers' loan rates
and the coverage of agricultural withdrawal services. It used the analytic
hierarchy process to measure inclusive finance in Chinese provinces in
2013 (Jiao, Huang, Wang, & Zhang Shaohua, 2015). Another study used
3
International Review of Financial Analysis 78 (2021) 101889
2017 CHFIS data to select 12 subdivision indicators from the two levels
of demand and supply and the average Euclidean distance method to
measure household financial inclusion in China and measured general
household finance in China from a microlevel perspective focused on
Hui Finance (Yin, 2019).
At present, most foreign scholars believe that the development of
digital financial inclusion can promote economic growth. A country's
level of economic development is related to its degree of financial in­
clusion. The result of digital financial inclusion can not only promote
economic growth but also effectively improve the stability of the
financial system and provide increasingly extensive opportunities for
society, which helps improve the living standards and welfare of low-
income groups, thereby continuously promoting economic growth
(Imam and Kpodar, 2016; Brander, 2006; Hu, Liu, & Peng, 2020; Swamy
& Vighneswara, 2014). Since the concept of inclusive finance was
introduced to China in 2006, domestic scholars have begun to pay
attention to the impact of inclusive finance development on economic
growth and have carried out a large number of theoretical and empirical
studies and have achieved in-depth research results. In terms of research
on the relationship between inclusive finance development and eco­
nomic growth, most scholars believe that the development of inclusive
finance contributes to economic growth. Some scholars have used the
principal component analysis method to measure China's financial in­
clusion index and have used the VAR model for empirical analysis to find
that financial inclusion has a more apparent positive effect on economic
growth (Kassi, 2020). One study used China's provincial panel data for
2000 to 2014 to measure the development of digital financial inclusion
in 30 Chinese provinces and conduct empirical research on the rela­
tionship between financial inclusion and economic growth, showing
that the overall result of financial inclusion in China is at a low level but
has a positive effect on economic growth (Arner, Buckley, Zetzsche, &
Veidt, 2020). However, some scholars hold different views. For example,
some studies use subdivision indicators to measure levels of inclusive
finance in various regions of China, conduct empirical analyses on the
relationship between inclusive finance and economic growth in China,
and find that in the central and western areas of China, levels of inclu­
sive finance are significantly lower than those in the east and that there
is an inverted U-shaped relationship between the development of in­
clusive finance and economic growth. The story of inclusive finance in
central and western China has a significant positive impact on economic
growth, while in the eastern region (Basani, Isham, & Reilly, 2008;
Evans & Alexis, 2014).
Regarding the construction of an indicator system for digital finan­
cial inclusion, because relevant economic data are challenging to obtain,
domestic scholars often use the digital financial inclusion index jointly
compiled by the Peking University Digital Finance Center and Ant
Financial Group for relevant research. Therefore, the Peking University
Digital Finance Research Center selected 33 indicators from the three
dimensions of digitalization, depth of use, and breadth of coverage to
build a digital financial inclusion indicator system to compile and
publish China's 2011–2015 and 2016 data in 2016 2019, respectively.
As a result, the 2018 Provincial Digital Financial Inclusive Development
Index more objectively and comprehensively reflects China's digital
financial inclusion (Guo, 2020).
From the relevant literature produced in China and abroad, we find
that scholars at home and abroad have conducted in-depth research on
the relationships between financial development, inclusive finance, and
economic growth. Still, since digital financial inclusion has been at play
for a relatively short period, research on this topic is lacking. Digital
financial inclusion is different from traditional inclusive finance. It
emphasizes the use of big data, cloud computing, and other digital
technologies to improve the scope and reach of financial services, which
can offer SMEs and individuals more comprehensive and convenient,
and lower-cost financial services. However, these characteristics of
digital financial inclusion have little impact on economic growth and
how they are affected. Moreover, there is a lack of relevant research.
Y. Liu et al.
Therefore, this paper studies the impact of digital financial inclusion on
China's economic growth and associated mechanisms and systems by
drawing on previous achievements.
3. Mechanism analysis
As an in-depth combination of digital technology and traditional
inclusive finance, this relatively limited literature on the impact of
digital financial inclusion on China's economic growth and research on
the mechanisms of the effect of digital financial inclusion on China's
economic growth is lacking. This section focuses on whether digital
financial inclusion affects some essential factors that restrict China's
economic growth., this section summarizes the possible impact of digital
financial inclusion on China's economic growth. On the one hand, the
development of digital financial inclusion can promote China's eco­
nomic growth by promoting the entrepreneurship of SMEs. SMEs can
then obtain credit support in a more timely and convenient manner
through digital financial channels, and digital financial inclusion as an
economic infrastructure provides many SMEs with a large number of
innovation and entrepreneurship opportunities. On the other hand, the
development of digital financial inclusion can promote China's eco­
nomic growth by stimulating household consumption. Digital financial
inclusion has effectively eased the liquidity constraints of residents
through convenient and efficient digital payment methods and con­
sumer credit products such as Huahua. It has dramatically increased the
randomness and likelihood of consumption.
3.1. Promoting economic growth by promoting SME entrepreneurship
SMEs often lack sufficient capital guarantees in the early stages of
entrepreneurship due to financing costs and difficulties. At the same
time, financial institutions still discriminate against such enterprises
when issuing loans. On the one hand, SMEs often face high business
risks. If their income is too low, it becomes difficult to obtain financial
support. On the other hand, financial institutions are often more willing
to grant loans to large and medium-sized enterprises and state-owned
enterprises. Given the unique cultural environment and policy
discrimination faced by small and medium-sized enterprises in
financing, it is difficult for them to obtain financial support from
traditional large and medium-sized financial institutions. Well-
developed digital financial inclusion can effectively alleviate this situ­
ation. Digital financial inclusion uses small data technology to conduct
risk assessments for SMEs at a lower cost. This assessment method differs
significantly from traditional risk assessment methods. Risk assessment
methods often focus on complex information such as data on operating
strength and financial status. In contrast, digital financial inclusion risk
assessment methods emphasize extensive data analysis to build risk
assessments on loan applicants' massive behavior data on the Internet
and other soft information, which helps SMEs ease their financial
constraints.
In addition, digital financial inclusion as an economic infrastructure
can effectively promote business innovation and indirectly improve
entrepreneurial opportunities for SMEs. Digital financial inclusion en­
ables merchants and consumers to complete commodities transactions
online, completely changing offline transaction modes of traditional
commerce and helping innovations of business models continue to
emerge. Emerging business models such as online takeaways, shared
bicycles, new retail models, and online car rentals occurring in major
cities in China are inseparable from digital payment technology. The
development of digital financial inclusion has extensively promoted
business model innovation and created many business opportunities.
Therefore, digital financial inclusion can affect the entrepreneurship of
small and medium-sized enterprises by lowering the financial con­
straints and thresholds for the entrepreneurship of small and medium-
sized enterprises and promoting business model innovation, which af­
fects China's economic growth.
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International Review of Financial Analysis 78 (2021) 101889
3.2. Stimulating household consumption and promoting economic growth
With severe downward pressure on the Chinese economy, con­
sumption is playing an increasingly important role for the Chinese
government as an essential channel for stabilizing the economy and
protecting people's livelihoods. Digital financial inclusion uniquely
promotes residents' consumption behavior through convenient and
efficient digital payment methods. At the same time, online shopping is
more dependent on the support of digital financial technology. Web
browsing has made residents' consumption behavior more random and
accidental, reducing the time cost of consumption and significantly
increasing the number of spontaneous purchases made by residents.
In addition, residents' consumption is often inhibited by liquidity. In
consumption behavior, residents are often willing to buy certain com­
modities, but they cannot purchase them due to a lack of funds and
cannot obtain loans in time. Digital financial inclusion has effectively
improved the convenience and availability of consumer loans through
consumer credit products such as “ant flower chanting” and “micro­
finance loans.” As a result, it has greatly satisfied residents' desires to
advance their consumption. As tools for allocating resources across pe­
riods, these financial innovation products help alleviate the liquidity
constraints on residents' consumption and maximize their consumption
utility. With the continuous popularization of digital financial inclusion,
residents' habit of using consumer credit has been gradually cultivated,
and expectations for the availability of future consumer loans are also
significantly increased, further addressing consumer desires. Therefore,
while digital financial inclusion renders household consumption more
convenient and efficient, it also dramatically eases the liquidity con­
straints faced by household consumption to stimulate consumption,
which is another important channel for promoting China's economic
growth.
The development of digital financial inclusion has promoted eco­
nomic growth through the above two channels. As a result, it has
become a new focus of economic growth, further enriching the impact of
traditional financial development on economic growth. However, the
impact of digital financial inclusion on China's economic growth and
whether actual economic data can verify this influencing mechanism
require further empirical analysis.
4. Empirical analysis of the impact of digital inclusive financial
development on china's economic growth
Sims pioneered the Vector Auto Regressions (VARs) model, a stan­
dard method in macroeconomics to deal with mutually causal variables
(Sims, 1980). However, the VAR model has high data requirements,
more estimated parameters, and extensive data handling. When using
this model to do actual estimation, some parameters are usually set to
0 artificially, which may easily cause the model structure to contradict
the economic theory and make the model conclusion unreliable.
Bayesian inference theory provides an effective way to solve the short­
comings of traditional VAR models. (Litterman, 1986) established a
Bayesian vector autoregressive model to deal with the constraint prob­
lem in model estimation in a relatively simple way by not locking in a
value but letting the model parameters converge to that value when the
estimated parameter is determined to be a specific value. This approach
yields more accurate estimates when the sample size is sufficient.
Compared to traditional VAR methods, BVAs (Bayesian Vector Autore­
gressions) are more precise in short-term forecasting and do not suffer
from the structural unreliability problem of traditional VAR models
(Cuaresma & Doppelhofer, 2007; Doppelhofer & Weeks, 2010).
In this section, from a quantitative perspective, provincial panel data
from 2011 to 2019 in China are selected as the sample for empirical
analysis, and a Bayesian vector autoregressive model (BVAR) is first
constructed to investigate whether the development of digital financial
inclusion can promote economic growth at the national level. Then, we
further examine the regional heterogeneity of the development of digital
Y. Liu et al. International Review of Financial Analysis 78 (2021) 101889

financial inclusion affecting economic growth by region and analyze the
nonlinear characteristics of the economic growth effect of digital
financial inclusion using a threshold panel model, and finally verify the
impact mechanism proposed in the previous paper using a multiple
mediation model and test the reliability of the above findings through a
series of robustness tests.
4.1. Bayesian vector auto regressive model construction
4.1.1. Model setting
Although the classical economic growth theory assumes that eco­
nomic growth is driven by the input of capital and labor factors, given
capital, labor, and technology, different levels of financial inclusion lead
to additional production (Anzoategui, Demirgü-Kunt, & Pería, 2014). In
this paper, we propose a theoretical function gdp = f(s, c) for the level of
financial inclusion affecting economic growth in China, gdptotal output,
financial inclusion development in China, and c other factors that affect
economic growth. The following equation is obtained by simultaneously
differentiating both sides of the above theoretical function and making a
simple deformation.
dgdp
=
s ∂gdp ds
+
c ∂gdp dc
. calculation formula is defined as follows:
gdp gdp ∂s s gdp ∂c c
Translating the above formula into an econometric model, a log-
linear regression model of the level of financial inclusion development
and economic growth in China is obtained.
lngdpt = β0 + β1 lnst + εt
Where β1 represents the industrial elasticity and indicates the size of the
contribution of financial inclusion to economic growth in China. gdp
Represents GDP, ln means taking the logarithm, t represents time, and εt
is a random disturbance term.
The VAR model can describe the response process of mutual shocks
between different variables. Its most significant advantage is that it does
not need to distinguish between endogenous and exogenous variables.
Thus, for example, the general matrix form of the porder vector autor­
egressive model VAR(P), which is assumed to contain k variables, can be
expressed.
Therefore, this paper also adopts the BVAR model to solve the problems
above and make the VAR model estimation results more effective.
4.1.2. Variable selection
Because we use provincial panel data and the population size of each
studied province varies greatly, we use the GDP deflator per capita to
measure the economic growth indicators to eliminate the difference in
economic growth caused by different population sizes logarithmically.
Financial data related to digital financial inclusion are difficult to
obtain. We thus use the digital inclusive financial index published by the
Peking University Digital Finance Center in 2019 to measure develop­
ment levels, and the data are processed logarithmically. The index se­
lects 33 secondary indicators from the three aspects of digitization,
depth of use, and breadth of coverage for measurement, which objec­
tively reflects the actual level of China's digital inclusive financial
development. Drawing on previous research, the control variables used
in this paper include physical capital stock, human capital level, in­
dustrial structure, and urbanization level.
The specific terms used and calculation method are as follows:
Physical capital stock (CAP): The most common way for measuring
physical capital stock is the perpetual inventory method. The specific
Kit = Kit− 1 (1 − δit ) + Iit (1)
where Iit is the total fixed assets of province i in year t, Kit− 1 is the
physical capital stock of area i in year t-1, and δit is the economic
depreciation rate fixed at 9.6%. The above formula was used to calculate
the physical capital stock of each province for 2012–2019. The physical
capital stock per capita (PCAP) is used as a measurement index and
processed by logarithm to eliminate the influence of demographic
factors.
Human capital level (HC): The average number of years of education
is used to reflect the level of human capital and is calculated as follows:
HC = 6 × Pri + 9 × Jun + 12 × Sen + 16 × Uni (2)
Pri, Jun, Sen, and Uni represent the proportion of people aged 6 years
or older with a primary, junior high, high school, and university edu­
cation, respectively.

Yt = Φ1 Yt− 1 + ΦYt− 2 + ⋯⋯ + Φp Yt− p + ut

4.1.2.1. Industrial structure (IS). The upgrading of industrial design is
conducive to improving labor productivity, promoting the continuous
⎞ ⎛ ⎛ ⎞
y1t u1t development of the economy. According to the previous literature, we
⎜ y2t ⎟ ⎜ u2t ⎟ use the value-added of the tertiary industry as a percentage of GDP as the
⎝ ⋮ ⎠, t = 0, 1, ⋯T，ut = ⎝ ⋮ ⎠, Φi =
Among them, Yt = ⎜ ⎟ ⎜ ⎟
indicator of the industrial structure change.
ykt ukt
⎛ ⎞ 4.1.2.2. Urbanization level (URBAN). An increase in urbanization is
(i) (i) (i) conducive to optimizing the urban-rural structure and promoting a
⎜ γ11 γ 12 ⋯ γ1k ⎟
⎜ (i) ⎟ virtuous cycle for the economy. We take the proportion of the urban
⎜γ γ (i) γ(i) ⎟
⎜ 21 22 ⋯ 2k ⎟, i = 1, 2, ⋯, p. population of the total population as an indicator to measure the level of
⎜ ⎟
⎜ ⋮
⎝ (i)
⋮ ⋱ ⋮ ⎟
⎠ urbanization.
γ k1 γ(i)
k2 ⋯ (i)
γkk
4.1.3. Data description
Yt The vector of endogenous variables, p is the lag order, Φ1, Φ2⋯Φp
We use provincial panel data for 30 Chinese provinces from 2011 to
is the matrix of coefficients to be estimated, utis the vector of pertur­
2019. The Tibetan region was not included in the sample due to a lack of
bations, and E(ut) = 0, E(utut′ ) = Σ, E(utus′ ) = 0, t ∕
= s.
data. Instead, we collected data from the website of the Statistics Bureau
The parameters to be estimated in an ordinary VAR(p) model are
of the People's Republic of China, the websites of the statistical offices of
considerable. Moreover, the validity of parameter estimation is affected
provinces, autonomous regions, and municipalities, and published so­
if the sample size is not significant; in addition, there may be a high
cial development bulletins. Our core variable is the China Digital In­
degree of covariance among the lagged explanatory variables. There­
clusive Financial Index compiled and published by the Peking University
fore, to overcome these problems, this paper draws on the “shrinkage
Digital Finance Research Center.
method” proposed by (Doan, Litterman, & Sims, 1984; Litterman, 1986),
For the scientific and accurate characterization of DFI development
which aims to reduce the number of parameters to be estimated by
in China at present, referencing the literature on the traditional financial
imposing restrictions on the parameters, usually by introducing a
inclusion index and considering the characteristics of DFI, the “Peking
Bayesian framework into the model. Many scholars have increasingly
University Digital Financial Inclusion Index (2011-2019)” was compiled
adopted this method (Fernández & Eduardo Ley, 2001; Ley, Steel, &
by the joint research group formed by the Digital Finance Research
Fernandez, 2001; Chai, Guo, Meng, & Wang, 2011; Dua & Ray, 2010).

5
Y. Liu et al.
Center of Peking University, Shanghai New Finance Research Institute
and Ant Financial Services Group using DFI data from the Ant Financial
Services Group. The index covers the provincial, city, and county levels
and the period of 2011 to 2019 and segments the DFI index from
different dimensions and based on the total index and coverage, use
depth and digital support services, payment, insurance, money funds,
credit investigation, investment, credit, and other business classification
indices. For further details on this index, please refer to Guo (2020). Our
descriptive statistical analysis of the above data is illustrated in Table 1
below.
The above descriptive statistical analysis shows that the natural
logarithm range of the explained variable for per capita GDP is exten­
sive, reflecting China's regional imbalance of economic development. By
verification, the natural logarithm of the DFI index conforms to the
normal distribution and has no extreme value. The distributions of other
variables are uniform with no maximum or minimum values 3 times the
standard deviation from the mean value, meeting the basic analysis
requirements.
4.1.4. Regression results and discussion
4.1.4.1. Unit root test. To avoid the pseudo-regression phenomenon
caused by the non-stationarity of variables, firstly, the stationarity test of
each variable is conducted. The method uses the ADF test. The test re­
sults are shown in Table 2.
The results in Table 2 show that the original series lndfi is not smooth
at the 10% level, while their first-order difference series all reject the
initial hypothesis of the existence of a unit root in the series at the 1%
significant level, indicating that all four series are first-order single in­
tegers, i.e., I(1) .
4.1.4.2. Cointegration test. If the cointegration is established, the
regression is credible. Moreover, according to the unit root test results,
we know that all variables are first-order single integers, which satisfies
the cointegration test's requirement of the same order single integer.
Therefore, the JJ cointegration method (Cavaliere, Rahbek, & Taylor,
2010) is used for the following tests, and the results are shown in
Table 3.
From the results in Table 3, both the maximum eigenvalues and the
trace statistics consistently show that lngdp and lndfi reject the original
hypothesis of no cointegration at the 5% level, indicating one. There­
fore, only one cointegrating relationship between them, i.e., the long-
run stable equilibrium relationship, is established, and the cointegrat­
ing equation can be found, and the estimation results are as follows.
lngdpt = 0.9624 + 0.3754lndfit + [ar(1) = 1.0306 , ar(2) = − 0.3127 ]
The adjustable R2 is 0.9489, the LR statistic is 227.49, and the F-
statistic passes the significance test at the 1% level, meaning that the
cointegration model has a good fit and the overall linear relationship
holds. DW = 1.8766 (1.656 < DW < 2.344), indicating no first-order
serial. The p-value of the LM test for second-order serial correlation is
0.2640. There is no second-order serial correlation, which indicates that
the estimated parameters of the model are valid. The cointegration
equation reflects the long-run equilibrium relationship between the
variables, which shows that the long-run impact of financial inclusion on
Table 1
Descriptive statistical analysis.
Variable Abbreviation Maximum value
Natural logarithm of GDP per capita (USD) lnPGDPit 22.49
Natural logarithm of the digital inclusion index lnDFI 4.25
Physical capital stock per capita PCAP 15.49
Human capital level HC 5.12
Industry structure IS 17.16
Urbanization level URBAN 0.82
6
International Review of Financial Analysis 78 (2021) 101889
economic growth in China is positive and significant at the 1% level. In
terms of economic significance, the estimated coefficient is 0.37540.27,
implying that a 1% increase in China's financial inclusion index results
in average GDP growth of 0.3754%.
4.1.4.3. Bayesian VAR model building and estimation. The impulse
response function is mainly used to analyze what impact a shock to one
endogenous variable in the VAR model will have on other endogenous
variables. This paper focuses on the relationship between financial in­
clusion and economic growth in China, using impulse response and
variance decomposition to analyze the reaction of economic growth to
the development of financial inclusion in China and the proportional
contribution of variance changes in economic growth, respectively.
Since the previous tests show that each variable passes the cointe­
gration test, a VAR model can be built directly. In this paper, we adopt a
new method provided by evals9.0-Bayesian VAR to estimate each
parameter, which is suitable for a small sample size but more parameters
to be evaluated and can alleviate the possible covariance problem of
each lagged endogenous variable in the VAR model. After continuous
attempts of the model, the last type is Normal-Wishart, the initial re­
sidual covariance is chosen as Diagonal, and the parameter prior setting
type is Hyper-parameters. The BVAR model is first established to
determine the optimal lag order, and according to the AIC, SC, H Q, and
FPE criteria, it is found that lag 1 is the best, so the BVAR (1) model is
established. Furthermore, the mode of the inverse of the maximum
characteristic root is 0.993651, less than 1, indicating that the BVAR (1)
model is stable and can be analyzed by impulse response and variance
decomposition.
First, to not be influenced by the ranking of variables, the generalized
impulse response function is used to analyze. From Fig. 1, the China
Financial Inclusion Index responses are all positive, which precisely
indicates that the development of financial inclusion in China has a
positive driving effect on economic growth. Furthermore, the response
of lngdp a generalized shock lndfi with one standard deviation shows
increasing characteristics. Specifically, the reaction in period 1 is
0.0564, the response intensity increases to 0.0600 in period 2, and the
response increases gradually after period 3 to 0.1075 in period 7. period
7 to 0.1075. This is consistent with the reality in China, where financial
inclusion has more than tripled in size between 2011 and 2017, and the
proportion of total loans in China has increased from the initial 0.12% to
0.31%.
4.1.4.4. Variance decomposition. The variance decomposition mainly
analyzes the magnitude of the contribution of each generalized shock to
the variance change of the endogenous variables to determine the
importance of different shocks to the endogenous variables. The vari­
ance decomposition is mainly used to analyze the contribution of each
generalized shock to the variance of endogenous variables to determine
the importance of different shocks to endogenous variables. Therefore,
the variance decomposition is further used to analyze the significance of
changes in financial inclusion on economic growth in China. The results
of variance decomposition are shown in Table 4.
First, from the variance decomposition of the seven periods
(Table 4), the impact of financial inclusion shocks on economic growth
in China varies widely. Over time, the contribution of its wonders to the
Minimum value Average Standard deviation
3.57 9.22 2.25
1.02 1.75 0.51
2.56 6.65 3.81
0.82 1.18 1.89
5.26 8.31 2.12
0.38 0.51 0.63
Y. Liu et al. International Review of Financial Analysis 78 (2021) 101889

Table 2
Unit root test results.
Variables Type of test (C, T, P) ADF statistics Critical value level (1%) Essential value level (5%) Critical value level (10%) Conclusion

lngdp (C,T,4) − 0.7952 − 4.2627 − 3.5530 − 3.2095 Unstable

dlngdp (C,T,3) − 4.7550 − 4.2627 − 3.5530 − 3.2096 Stable***
lndfi (C,T,0) − 1.3452 − 4.2268 − 3.5366 − 2.6120 Unstable
d ln dfi (C,T,1) − 4.7499 − 3.6329 − 3.5366 − 3.2003 Stable***

Note: The test form in parentheses C indicates that the test equation has an intercept term, T suggests that the equation has a trendterm, N indicates that there is no
intercept term or trend term, P is the test lag term, and the corresponding lag term is determinedaccording to the SIC information; *** indicate smooth at the 1%
significance levels.

Table 3
Results of co-integration test.
Original hypothesis Trace statistics 5% critical value P-value Maximum Eigenvalue 5% critical value P-value

None* 63.5839 54.0790 0.0056 30.6099 28.5881 0.0122

At most 1 32.9740 35.1928 0.0851 19.8930 22.2996 0.1048

Note: *Indicates rejection of the original hypothesis at the 5% significance level.

regional differences. The economic growth effect of digital financial

inclusion development is more significant in the eastern region than the
central and western areas. The economic growth effect of digital
financial inclusion development is more important in the east part than
in the west and major regions. Why does this difference occur? The
reason for this difference is that, compared with traditional financial
inclusion, digital financial inclusion relies more on emerging digital
technologies such as big data and cloud computing to further expand the
reach and service scope of financial inclusion. Regions with better
Internet development can provide better “development soil” to enable
emerging digital technologies to The better the Internet development,
the better the “development soil” can be, so that the emerging digital
technologies can be put into practice, and the stronger the economic
growth effect will be. Therefore, the impact of digital financial inclusion
Fig. 1. The response curve of “2” to “3” shock. on regional economic growth is closely related to the level of local
Internet development: when the local Internet development is at a low
level, the impact of digital financial inclusion on the economic growth of
Table 4 the region is small; but when the Internet development reaches a high
Variance decomposition of “2”.
level, the effect of digital financial inclusion on the economic growth of
Time lngdp lndfi East Middle West the area will be enhanced, so We reasonably assume that the further
1 2.655 32.256 41.268 31.548 25.187 development of regional Internet level may have other effects on the pull
2 2.675 33.562 42.681 32.157 26.816 of digital financial inclusion on economic growth, which means that the
3 2.682 33.861 44.586 33.485 27.681 regional Internet development level may be a threshold variable that
4 2.684 35.268 45.186 33.681 28.865
indirectly affects the power of financial inclusion on economic growth,
5 2.692 36.264 46.846 34.792 28.186
6 2.697 36.562 49.826 36.812 29.680 so the threshold regression model is used to test and discuss this hy­
7 2.702 36.281 51.846 37.826 31.681 pothesis in the following section.
Average value 2.685 35.684 45.685 33.862 28.248

4.2. Threshold regression model construction

development of lngdp increases year by year, to 2.702% in period 7. The
gift of China's financial inclusion to the variance change lngdpincreases 4.2.1. Method
from 32.256% in year 1 to 35.684% in year 7, which is also consistent Bruce proposed a variable-intercept panel threshold model of indi­
with the results of the long-run cointegration equation. vidual fixed effects (Bruce and Hansen, 1999). The following is a brief
Second, to further test whether the economic growth effect of digital introduction to the panel model using a single threshold value as an
financial inclusion development is regionally heterogeneous, this paper example:
divides 30 Chinese provinces into three regions, namely, eastern, cen­ ′
Yit = αi + Xit β1 + εit , if qit ≤ γ
tral, and western, according to the regional division method announced ′ (3)
by the State Council. The results are shown in Table 4, where columns Yit = αi + Xit β2 + εit , if qit > γ
(4)–(6) are the results for eastern, central, and western regions,
where i = 1, 2, …, N; t = 1, 2, …, T; qit is the threshold variable, γ is the
respectively. Further comparing the coefficient sizes of digital financial
threshold value to be estimated, and exogenous explanatory variables
inclusion variables in the three areas, it can be found that the co­
Xit, εitare independently identically distributed and unrelated Xit.
efficients of digital financial inclusion variables in the eastern region are
The parameter estimate of this model illustrated shown below.
significantly more significant than those in the central and western
First, transform the above two equations into one equation using an
areas. In contrast, the coefficient differences in the west and essential
indicator function
areas are relatively small, which indicates that the impact of digital
financial inclusion development on economic growth has more obvious ′ ′
Yit = αi + Zit δ + 1(qit ≤ γ)Xit β1 + 1(qit > γ)Xit β2 + εit (4)

7
Y. Liu et al. International Review of Financial Analysis 78 (2021) 101889

where δ is not affected by the threshold value; the indicator function is I Table 5
Evaluation index system of internet development level.
(⋅)
{ { A comprehensive index of First-level indicators Secondary indicators
1 if qit ≤ γ 0 if qit ≤ γ Internet development level Internet Optical cable line length
1(qit ≤ γ) = ; 1(qit > γ) = (5)
0 if qit > γ 1 if qit > γ infrastructure Local exchange capacity
construction Broadband access ports
Then, estimate the threshold and parameter values by minimizing Internet penetration Internet penetration
the residual value. Number of Internet users
Mobile phone penetration
In the previous section, we used a Bayesian VAR model to verify that
Internet development Number of domain names
digital financial inclusion development has a strong positive effect on depth Websites
economic growth and that there are significant regional differences in Pages
this effect in the east, middle, and west of China, with the economic Internet business Express delivery
growth effect of digital financial inclusion development being more scale Total telecommunications
business
critical in the east than in the central and western regions. Why does this
Software business income
difference occur? This paper believes that the reason for this difference
is that, compared with traditional financial inclusion, digital financial
inclusion relies more on emerging digital technologies such as big data Table 5.
and cloud computing to further expand the reach and service scope of We adopt the commonly used principal component analysis method
financial inclusion, and regions with better Internet development can to calculate the comprehensive evaluation index of the data. First, three
provide better “development soil” to enable emerging digital technolo­ common factors were determined based on a characteristic root greater
gies to The better the Internet development, the better the “development than one and a cumulative variance contribution rate reaching 85%.
soil” can be, so that the emerging digital technologies can be put into Then, general regression was used to calculate the total score. As a
practice, and the stronger the economic growth effect will be. Therefore, result, a total score of the Internet development level for each province
the impact of digital financial inclusion on regional economic growth is was obtained for 2011 to 2019. We use the variable selection method
closely related to the level of local Internet development: when the local adopted in the previous general panel regression model with GDP per
Internet development is at a low level, the impact of digital financial capita as the explanatory variable and digital inclusive financial index
inclusion on the economic growth of the region is small; but when the set as the core explanatory variable. Control variables include physical
Internet development reaches a high level, the effect of digital financial capital stock, human capital level, industrial structure, and urbanization
inclusion on the economic growth of the area will be enhanced, so We level. Logs are also taken for some variables. The data used in this sec­
reasonably assume that the difference in regional Internet level devel­ tion are introduced in detail in the previous quarter. The threshold
opment may have different effects on the pull of digital financial in­ variable—data on levels of Internet development in various region­
clusion on economic growth, which means that the regional Internet s—comes from the China Internet Network Information Center.
development level may be a threshold variable that indirectly affects the
size of the power of financial inclusion on economic growth, so this 4.2.3. Results and discussion
section uses a threshold regression model to test and discuss this hy­ We used the threshold effect test method proposed by Bruce and
pothesis. In this section, using a threshold regression model, based on Hansen (1999) to determine the double threshold regression model. The
the linear regression model that analyzed the impact of digital financial estimated results are shown in Table 6 below.
inclusion development on economic growth in the previous area, taking Table 5 shows that the development of digital financial inclusion has
into account the accurate examination of the nonlinear relationship a significant positive effect on economic growth, which is consistent
between digital financial inclusion and economic growth, the Internet with the results obtained from the linear regression model. However,
development level is used as a threshold variable to test the Internet there are specific differences in the impacts of digital inclusive financial
development threshold effect of digital financial inclusion affecting development on economic growth under different Internet development
economic growth. The specific model settings are shown below. levels from different perspectives. When the threshold, the level of
Internet development, is lower than the first threshold (2.17), the co­
lnPGDPit = α0 + β1 lnDFI it (INTER ≤ γ) + β2 lnDFI it (INTER
efficient of the digital inclusiveness financial variable is estimated at
> γ) + λXit + εit (6)

where i and t represent the i-th province and t-the period, respectively, Table 6
lnPGDPit is the explained variable, lnDFIit is the core explanatory vari­ Threshold model estimation results.
able, INTER is the threshold variable, the threshold value is γ, vector Xit lnPGDP
is the control variable, and the random interference term is εit.
Estimated coefficient t statistic

4.2.2. Variable selection and data description lnDFI(INTER≤2.17) 0.0502*** 8.95

lnDFI(2.17<INTER≤4.07) 0.0575*** 9.41
Most Chinese scholars often use single indicators, such as the Internet
lnDFI(INTER>4.07) 0.0694*** 10.53
penetration rate and network traffic, as threshold variables when lnPCAP 0.2556*** 3.38
studying levels of Internet development in various regions. While these HC 0.0446*** 4.26
indicators reflect the level of Internet development to a certain extent, IS 0.0073*** 6.55
they are not objective nor comprehensive (Carlbring et al., 2006; URBAN 0.0183*** 5.46
CONS 5.7062*** 6.81
Crenshaw, 2002). Therefore, we combine China's Internet development N 210
characteristics based on principles of systematization, scientific nature, F statistic 481.46***
dynamics, and operability from the four aspects of Internet infrastruc­ Adj. R2 0.9727
ture construction: Internet popularity, Internet development depth, and LR statistic 332
Internet business scale. Twelve secondary indicators were selected from Note: The test form in parentheses C indicates that the test equation has an
this dimension, and a comprehensive evaluation index system for the intercept term, T suggests that the equation has a trendterm, N indicates that
Internet development level was scientifically and comprehensively there is no intercept term or trend term, P is the test lag term, and the corre­
constructed. The specific contents of the index system are shown in sponding lag term is determinedaccording to the SIC information; *** indicate
smooth at the 1% significance levels.

8
Y. Liu et al. International Review of Financial Analysis 78 (2021) 101889

0.0502 and is significant. At this time, the digital inclusive financial
index increases by 1%, causing the region's per capita GDP to increase by
an average of 0.0502 percentage points. When the level of Internet
development is between the threshold (2.17) and second thresholds
(4.07), the coefficient of the digital inclusiveness financial variable is
estimated at 0.0575 and is significant. At this time, the digital inclu­
siveness financial index increases by 1% and increases the average GDP
per capita of the region by 0.0575 percentage points. When the Internet
development level exceeds the third threshold (4.07), the digital inclu­
sive financial index coefficient is estimated as 0.0694 and is significant.
At this point, each increase in the digital inclusive financial index in­
creases the average per capita GDP of the region by 0.0694 percentage
points. There are specific differences in the economic growth effects of
digital financial inclusion under different Internet development levels.
With continuous Internet development reaching a certain threshold, the
degree to which digital financial inclusion development promotes eco­
nomic growth also increases, providing a reasonable explanation for the
differences in the impacts of digitally inclusive financial effect on eco­
nomic growth in the eastern, central, and western regions.
4.2.4. Robustness test
To examine the reliability of the model results, we used various
methods for robustness testing.
i. First, we lag all independent variables by one period, i.e., we
estimate the effect of digital financial inclusion development in
the previous year on income distribution in the current year,
which can somewhat mitigate the reverse causality problem. The
results in column (1) of Table 7 show that the coefficient of digital
financial inclusion in the previous year is 0. 0240, which is sig­
nificant at the 1% level, indicating that digital financial inclusion
in the last year still has a substantial contribution to economic
growth in the current year, suggesting that the recent estimation
results are reliable.
ii. Second, we re-measure economic growth using total factor pro­
ductivity (TFP), as shown in column (2) of Table 7. The sign and
significance of the regression coefficients of digital financial in­
clusion are strongly consistent with the baseline regression re­
sults, indicating the contribution of digital financial inclusion to
economic growth and again validates the previous results.
iii. Next, we use provincial Internet penetration as an instrumental
variable for digital financial inclusion to further overcome po­
tential endogeneity. A valid instrumental variable must satisfy
both correlation and homogeneity conditions. On the one hand,
the generation and use of digital financial inclusion are based on
the Internet, so they are highly correlated; on the other hand, the
penetration of the Internet is not driven by the local economy but
by the top-down arrangement of national policies, which is highly
policy-oriented so that Internet penetration may be a valid
instrumental variable. The results of the instrumental variable
approach are shown in column (3) of Table 7, which shows that
digital financial inclusion significantly contributes to economic
growth, and the Anderson test p-value is 0. The Cragg-Donald
Wald F-test for weak instrumental variables is 49. 352, which is
much larger than the critical value of 16. 38 under 10% bias,
indicating no under-identification of instrumental variables and
weak instrumental variables. The Cragg-Donald Wald F-test was
49. The p-value of the overidentification test (Sargan test) is 0,
which also justifies the selection of instrumental variables.
iv. considering that the missing variables may affect the regression
results, we try to add the urbanization level (Urban) based on the
original control variables, which is expressed by the logarithm of
population density in this paper; Industrial structure (Structure),
this paper uses the proportion of the added value of the tertiary
industry in the regional GDP; Foreign investment (FDI),
expressed in terms of the ratio of actually utilized foreign capital
to regional GDP in the current year; Infrastructure (Facility), mea
sured by per capita road ownership area; The financial scale
(Government) is expressed by the ratio of general budget
expenditure to regional GDP; Human capital (Human Capital),
defined by the balance of the number of college students to the
total population of prefecture-level cities, and other variables
that may affect economic growth, this paper re-estimates the
benchmark model. The results in column (4) show that the
empirical results remain unchanged after adding other control
variables, indicating that digital financial inclusion has signifi­
cantly promoted economic growth.
v. Finally, considering that the four municipalities directly under
the central government, Beijing, Tianjin, Shanghai, and
Chongqing, differ significantly from the remaining prefecture-
level cities, both in economic size, population size, and admin­
istrative level. The paper is recalculated using the subsample after
excluding the four municipalities, and the estimation results are
reported in column (5) of Table 7. It can be seen that the signif­
icance of the numerical financial coefficients is still significantly
positive at the 1% level, and there is no significant change in the

Table 7
Robustness and endogeneity test results.
Robustness tests Endogeneity
test

Dependent variable One period TFP Substitution of the dependent Adding control Eliminate interference from PSM-DID
behind variable variables municipalities

(1) (2) (3) (4) (5) (7)

Digital financial 0.024*** 0.035** 0.026*** (0.585) 0.376*** (0.967) 0.381** (0.345)
inclusion (0.482) (0.083)
Policy 0.449***
(0.022)
Urban 0.355** (0.364) 0.268** (0.115)
Structure 0.627 (0.689) 0.433* (0.264)
FDI 0.248** (0.687) 0.346***
(0.368)
Facility 0.682*** (0.364) 0.562***
(0.238)
Government 0.187 (0.348) 0.168 (0.365)
Human Capital 0.264* (0.216) 0.248* (0.268)
Number of samples 210 210 210 210 206 210
Adj. R2 0.862 0.816 0.838 0.768 0.822 0.816
LR statistic 246 249 268 248 267 256

NOTE：***, **, * represent significant at 1%, 5% and 10% significance levels, respectively.

9
Y. Liu et al.
magnitude of the coefficients, again indicating that the results of
this paper are robust.
4.2.5. Endogeneity analysis
The endogeneity that this paper may face mainly comes from two
aspects: first, the omitted variables, although this paper controls for a
series of variables that would impact economic growth, the factors
affecting economic growth in the residual term still cannot be excluded
entirely. Second, reverse causality, the development of digital finance
can promote economic growth, and the economy's sustained growth will
lead to digital finance development. For the possible endogeneity
problem, this paper mitigates it by testing for the aid of exogenous policy
shocks.
Since economic growth in cities is often influenced by various fac­
tors, to more robustly assess the economic growth effects of digital
financial inclusion, this paper uses an exogenous policy shock to
examine the impact of digital financial inclusion on economic growth,
following the approach of (Reeves, Mckee, Mackenbach, Whitehead, &
Stuckler, 2017). Considering that the development of digital finance is
closely related to the construction of network facilities, this paper ex­
amines it using the policy of “broadband China.” The Chinese govern­
ment started to promote the “Broadband China” pilot project in 2013
and selected 120 cities (clusters) as pilot cities in 2014, 2015, and 2016.
As a result, the government invested more funds to expand the broad­
band network coverage and improve the network operation speed in the
selected cities. Since the selected cities and the non-selected cities are
affected by the policy with different intensities, the selected cities can be
regarded as the treatment group and the non-selected cities as the
control group. The “broadband China” policy from 2014 to 2016 is
treated as a natural experiment. The double-difference method (DID)
assesses the economic growth effect of the policy. Since the cities enter
the pilot in batches, a multi-temporal double difference model (Time-
VaryingDID) is developed to estimate.
lnPGDPit = β0 + β1 Policyi,t + β2 Controli,t− 1 + λi + μt + εit
In the above equation, lnPGDPit is the logarithm of real GDP per
capita, Policyi, t is the policy dummy variable, which is 1 for cities that
entered the “Broadband China” pilot in the same year and 0 otherwise,
Controli, t− 1 is the same control variable as above, λi is the city fixed
effect, μ represents the year fixed effect, and εit is the error disturbance
term.
A prerequisite to being satisfied for policy evaluation using the
double-difference method is the parallel trend assumption, i.e., the time
trend between the treatment and control groups is consistent in the
absence of extraneous policies. To better satisfy the parallel trend
assumption, this paper first uses the propensity score matching method
(PSM) to match the control group with similar characteristics to the
treatment group. In the first step, the propensity score value is calcu­
lated. The control variable in Eq. (1) is used as the matching variable.
Next, the real GDP per capita is used as the outcome variable in the logit
regression to calculate the propensity score value (PS value), i.e., the
probability of entering the treatment group; in the second step, the 1:1
nearest neighbor matching method is used to match, and after the
matching variables satisfy the balance test, the cities with characteristics
as similar as possible to those of the selected cities are obtained. Finally,
the matched samples are used for regression.
In Table 7 above, column 7 reports the propensity score matching
double-difference method (PSM-DID) estimation. The coefficient of
“Policy” is the double difference estimator, i.e., the average effect of the
“Broadband China” policy in the pilot cities, which is also the coefficient
of interest. It can be seen that the coefficient is significant at the 1%
level, indicating that the “ Broadband China” pilot policy has a signifi­
cant positive contribution to economic growth. This paper also conducts
a robustness test by replacing the matching method, and the results of
the study still hold after the robustness test. Unfortunately, the results
10
International Review of Financial Analysis 78 (2021) 101889
are not reported here for lack of space.
5. Examination of the mechanism of digital inclusive financial
development effects on economic growth
5.1. Method
The above empirical results show that digital financial inclusion has
played a significant role in promoting economic growth. Combined with
the first part of the mechanism analysis, this article takes the entrepre­
neurial level of small and medium-sized enterprises and residents' con­
sumption level as intermediary variables. It introduces multiple
intermediary models of digital financial inclusion in an empirical test of
the impact of development on economic growth. We analyze the
different channels through which digital financial inclusion affects
economic growth based on the multiple intermediary models. From this
model, individual intermediary effects can be studied and compared,
and overall intermediary results can be analyzed.
The specific form of the multiple intermediary models is described as
follows:
Y = cX + εX
Mi = ai X + εi
∑n (7)
′
Y=cX+ bi Mi + ε
i=1
Coefficient c represents the total effect of X on Y, Mi is the i-th
intermediary variable, aibi denotes the intermediary effect of interme­
∑
diary variable Mi, ni=1 ai bi represents the overall intermediary effect of n
intermediary variables, and c′ denotes the direct effect of X on Y. Total
∑
effect C, overall intermediary effect ni=1 ai bi and direct effect c′ have the
following relationship:
∑
n
(8)
′
c= ai bi + c
i=1
For selecting intermediary variables, we follow (Devlin et al., 2010)
in using the CPEA index as a measure of interprovincial SME entrepre­
neurial level and adopt the logarithmic introduction model; resident
consumption refers to the practice of most documents. Thus, consump­
tion levels are measured, and the consumer price index is based on 2011
as the base period and is logarithmically introduced into the model. Our
selection of core explanatory, interpreted, and control variables are
consistent with that described above. The original data for intermediary
variables were obtained from the National Bureau of Statistics and sta­
tistical yearbooks of various provinces. Other data sources used are
described above in detail and are not repeated here.
5.2. Results and discussion
As noted above, to prevent reverse causality between the explanatory
and explained variables and to avoid endogeneity problems caused by
missing variables, we use data on Internet development levels lagged as
a variable for regression. Columns (1)–(3) of Table 8 present the results
for economic growth, SME entrepreneurship, and household consump­
tion regressed on digital financial inclusion, and column (4) includes
SME entrepreneurship and household consumption as intermediary
variables. The unrecognizable and weak instrument variable test results
indicate that the selected instrument variable is influential.
In addition to the intermediary effects of the above two intermediary
variables, we use the residual impact of digital inclusive financial
development on economic growth as the direct effects of digitall6 in­
clusive financial development on economic growth. We analyze the test
results for the intermediary impact from the following three
perspectives.
Y. Liu et al. International Review of Financial Analysis 78 (2021) 101889

Table 8 development through stimulating consumer consumption is more

Analysis of multiple intermediary effects. prominent.
2SLS Thus, promoting SME entrepreneurship and stimulating household
consumption are two important channels for the impact of digital in­
(1) (2) (3) (4)
clusive financial development on economic growth. Moreover,
lnDFI 0.1147*** 0.4927*** 0.1447*** 0.0527*** compared to promoting entrepreneurship of small and medium-sized
(6.82) (3.59) (2.60) (4.68)
lnEn – – – 0.0349***
enterprises, stimulating household consumption has a more significant
(4.99) effect on economic growth. We can interpret this result in the following
lnC – – – 0.2755*** two ways. On the one hand, digital financial inclusion has a broader
(6.57) audience among individuals rather than small and medium-sized en­
Control Yes Yes Yes Yes
terprises. But, on the other hand, when consumers rely on innovative
variable
LM- 52.558 52.549 52.583 47.172 digital financial products such as Alipay and WeChat payment, they
Statistics [0.0000] [0.0000] [0.0000] [0.0000] continue to use and form consumer habits.
Wald- 848.861 848.8634 848.827 748.499 On the other hand, considering the low survival rate of SMEs in
Statistics [0.0000] [0.0001] [0.0000] [0.0000] China, the financing behavior of SMEs is not sustainable enough, and the
N 180 180 180 180
R 2
0.9555 0.8016 0.8970 0.9718
associated volume is much smaller than that of individuals. On the other
hand, the steady growth of consumption has more direct and apparent
Note: The test form in parentheses C indicates that the test equation has an effects on the improvement of economic growth. Moreover, the impact
intercept term, T suggests that the equation has a trendterm, N indicates that
of the entrepreneurship of small and medium-sized enterprises on eco­
there is no intercept term or trend term, P is the test lag term, and the corre­
nomic development occurs through a slowly accumulating process.
sponding lag term is determinedaccording to the SIC information; *** indicate
smooth at the 1% significance levels.
Therefore, it is better to stimulate consumption to promote economic
growth through the country's vigorous stimulation of consumption,
creating one channel for expanding domestic demand.
5.2.1. Analysis of individual mediation effects
The intermediary effect of the development of digital financial in­
6. Conclusion and suggestions
clusion through the promotion of entrepreneurship channels for SMEs is
valued at 0.0172 (=0.4927 × 0.0349), which is significant at the 1%
6.1. Main conclusion
significance level. This result shows that the development of digital
financial inclusion has promoted economic growth by promoting the
This paper first explores the impact of digital financial inclusion on
entrepreneurship of small and medium-sized enterprises. For every 1%
economic growth based on a Bayesian macroeconomic analysis frame­
increase in the digital inclusive financial index, the CPEA index in­
work and a Bayesian vector autoregressive model using provincial panel
creases by 0.4927 percentage points, resulting in an indirect increase in
data for China from 2011 to 2019. Overall, digital financial inclusion has
GDP per capita of 0.0172 percentage points. Similarly, the intermediary
a significant role in promoting economic growth. By region, the devel­
effect of digitally inclusive financial development by stimulating resi­
opment of digital financial inclusion in eastern, central, and western
dents' consumption channels is valued at 0.0399 (=0.1447 × 0.2755),
China can significantly boost economic growth. Still, the effect on the
significant at the 1% level. This result shows that the development of
east part is more evident, while the impact in the west and significant
digital financial inclusion has promoted economic growth by stimu­
regions is limited. Next, Internet development is introduced as a
lating household consumption. For every 1% increase in the digital
threshold variable to further analyze the nonlinear relationship between
financial inclusion index, the level of household consumption increases
digital inclusive financial development and economic growth. First,
by 0.1447 percentage points, which will lead to an indirect growth in
total scores of Internet development levels for various regions are ob­
GDP per capita of 0.0399 percentage points.
tained through principal component analysis. Then a panel threshold
regression model is established to analyze the impact of digital inclusive
5.2.2. Analysis of the overall intermediary effect
financial development on economic growth under different Internet
After summing the individual mediation effects, the overall media­
development levels. The results show that digital financial inclusion
tion effect is 0.0571 (=0.4927 × 0.0349 + 0.1447 × 0.2755), significant
under different Internet development levels has a different role in pro­
at the 1% significance level. This result shows that the development of
moting economic growth.
digital financial inclusion has promoted economic growth by promoting
Furthermore, the higher the level of Internet development in a region
SME entrepreneurship and stimulating residents' consumption. Next, we
is, the stronger the impact of digitally inclusive financial development
find that the direct effect of digital inclusive financial development on
on economic growth becomes. Finally, through the establishment of
economic growth is valued at 0.0576 (=0.1147–0.0571), which is sig­
multiple intermediary models, the intermediary effects of digital inclu­
nificant at the 1% level. Overall, the direct and indirect effects of digital
sive financial development on economic growth are analyzed and
financial inclusion on economic growth are almost equal. This result
compared to promote SME entrepreneurship and household consump­
shows that promoting SME entrepreneurship and stimulating residents'
tion, which occur from digital financial inclusion. Thus, two virtual
consumption are two important channels for the impact of digital
channels affect economic growth. First, compared to promoting the
financial inclusion development on economic growth.
entrepreneurship of small and medium-sized enterprises, the stimulating
effect of household consumption on economic growth is more
5.2.3. Comparative analysis of individual intermediary effects
prominent.
The above results show that the individual intermediary effects of
digital inclusive financial development on economic growth through
6.2. Policy recommendations
promoting SME entrepreneurship and stimulating household consump­
tion are valued at 0.0172 and 0.0399, respectively. Thus, the interme­
6.2.1. Increase the participation of traditional financial institutions in
diary effect of stimulating residents' consumption channels is more
digital financial inclusion
substantial than promoting SMEs' entrepreneurship. Further calcula­
Our results show that the development of digital financial inclusion
tions show that the difference between the two is significant at the 1%
has a very significant role in promoting China's economic growth. At
significance level, indicating that compared to the promotion of SME
present, traditional financial institutions are far from participating in the
entrepreneurship, the intermediary effect of digital inclusive financial
practice of digital financial inclusion. While the main focus is on

11
Y. Liu et al.
emerging financial technology companies, traditional financial in­
stitutions still dominate China's current economic system, primarily
commercial banks. Commercial banks often experience many difficulties
in developing inclusive financial services due to policies, the environ­
ment, the market, and other factors. Traditional institutions should be
encouraged to participate in digital financial inclusion, such as by
encouraging commercial banks to increase investment in research and
development in the field of fintech and supporting commercial banks
and fintech companies in establishing cooperation or self-built financial
technology subsidiaries.
6.2.2. Strengthen the construction of the internet and increase the economic
growth effects of digital financial inclusion
The development of digital inclusive financial services is closely
related to soft environmental factors such as Internet development.
Therefore, a high level of Internet development is a necessary prereq­
uisite for the long-term development of digital financial inclusion. The
research presented in this paper shows that the economic growth effect
of digital financial inclusion shows a significant threshold for Internet
development. In eastern China, because levels of Internet development
are higher than in central and western China, the positive effects of
digital financial inclusion on regional economic growth are more potent
than those found in the west and major regions. It is easy to allow the
strong to grow stronger and the weak to grow weaker in the long run.
Therefore, to effectively improve digital financial inclusion in remote
and underdeveloped regions of developing countries, it is necessary to
vigorously develop Internet infrastructure in such areas to guarantee
digital financial inclusion development.
6.2.3. Encourage the innovation of digital inclusive financial products and
services
Our results show that digital financial inclusion can promote eco­
nomic growth by encouraging SMEs' entrepreneurship and residents'
consumption. At present, most fintech companies mainly serve con­
sumers and small and microscale enterprises. The primary business
forms involved include mobile payments and online microloans, and the
types of products, services, and innovations offered are far from suffi­
cient. Therefore, the development of digital financial inclusion should
focus on the innovation of related products and services in the future. On
the one hand, emerging financial technology companies, as pioneers in
the development of digital financial inclusion, should continue to dare to
innovate, actively deepen and expand the application of digital tech­
nology in the field of inclusive finance according to market conditions,
and continue to launch new products and services. On the other hand,
traditional financial institutions should also firmly grasp opportunities
in the digital era, be brave enough to embrace change and meet chal­
lenges, enter the field of digital financial inclusion, digitally transform
and upgrade traditional products and services, and further the digitali­
zation of conventional products and services.
Funding statement
The National Social Science Fund of China: On the identification of a
human community with a shared future(18BKS120).
Declaration of Competing Interest
We declare that we have no financial and personal relationships with
other people or organizations that can inappropriately influence our
work, there is no professional or other personal interest of any nature or
kind in any product.
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