Relationship banking and Small and Medium-Sized Enterprises (SMEs)

Abstract

This doctoral thesis examines the multifaceted dynamics of Small and Medium Enterprise (SME) financing and innovation in China through three interconnected essays. Each chapter addresses distinct yet complementary research questions, collectively revealing how SMEs navigate institutional constraints, leverage relational strategies, and adapt to the rise of fintech.

Chapter 1 explores the impact of firm-bank relationship spending on the financial constraints and loan conditions of SMEs in China. Leveraging a unique dataset covering various provinces and industries, we investigate the intensity of firm-bank relationships through SME-to-bank spending. Our findings highlight the trade-off in the SME-bank lending relationship. On the one hand, bank relationship spending reduces financial constraints for SMEs by facilitating access to loans. On the other hand, while this spending enables SMEs to secure more bank credit and longer-term loans, it also results in higher interest rates, increased guarantee requirements, and overall dissatisfaction with loan services. Our research provides new insights into the role of “guanxi” in China's credit market and sheds light on the cultural and political dimensions shaping relationship lending in China.

Chapter 2 examines the impact of bank relationships on innovation in SMEs through the lens of RDT. Using survey data from China, we find that while bank relationship expenditures by SMEs do not enhance technological innovation, they significantly foster non-technological innovation, such as improvements in organizational practices and marketing strategies. Effects vary by firm size, industry, and geography, emphasizing the contextual nuances of resource management. Relationship banking mitigates resource scarcity, provides certification benefits, and enhances SME resilience. Notably, government intervention does not inhibit innovation in these relationships. This study advances RDT by showing how SMEs strategically leverage banking ties for non-technological innovation, while highlighting the role of unique institutional factors, such as "guanxi," in shaping firm-bank dynamics.

Chapter 3 explores the evolution of MSME financing in the digital era, particularly analyzing the substitution effect of fintech platforms on relationship lending. We develop a conceptual framework that explains the importance of relationship lending and fintech platforms on MSMEs financing gap, and further explores the different role that these two channels play for small and large loan applications. Using unique survey data collected from Chinese MSMEs, we provide a comprehensive analysis of the evolving importance of different financing tools in MSMEs' access to finance. Using empirical data, we prove our theoretical prediction that the effect of fintech platform development on formal banking is non-linear and depends on the loan size. Specifically, fintech platforms effectively replace relationship banking for smaller loans by providing a more accessible alternative for MSMEs, while for larger loans, relationship banking retains its significance as a vital source of finance. This underlines the importance of soft information obtained via relationship lending for MSMEs to cover substantial financial needs.

By bridging Resource Dependence Theory and Information Asymmetry Theory, this thesis advances a framework that explains how SMEs strategically manage dependencies while adapting to technological disruptions. Theoretically, it extends RDT to ethical trade-offs and non-technological innovation, while recontextualizing information asymmetry through a loan-size lens. For policymakers, the findings advocate for (1) Regulate the transparency of relationship-based finance, enforce the disclosure of hidden costs and mitigate the trade-off between credit terms and availability, can curb unethical behavior without hindering productive bank-SME ties. (2) aligning financial incentives to support both technological and non-technological innovations would meet SMEs' diverse needs, fostering a more balanced innovation ecosystem. and (3) hybrid financial ecosystems that integrate fintech’s efficiency for small loans with relationship banking’s soft information advantages for larger financing needs. These insights collectively address the dual challenges of sustaining inclusive growth and ethical governance in China’s evolving financial landscape, make relationship banking and fintech a powerful enabler for SME growth, supporting flexibility, resilience, and innovation.

Date of Award	15 Nov 2025
Original language	English
Awarding Institution	University of Nottingham
Sponsors	China Scholarship Council
Supervisor	Marina Glushenkova (Supervisor), Wei Huang (Supervisor) & Kent Matthews (Supervisor)