Access to the Internet and Access to Finance: Theory and Evidence

Abstract

This paper aims at investigating the relationship between the use of the Internet and access to external finance of small and micro businesses, both theoretically and empirically. We first develop a theoretical model to explore how access to the Internet affects the credit availability of firms. The model suggests that access to the Internet can effectively mitigate financing difficulty of firms by alleviating information asymmetry and reducing agency cost, and thus can promote the sustainable development of those firms. The model also shows that access to the Internet can improve social welfare based on aforementioned mechanism. Using China household finance data from China Household Finance Survey, we tested the impact of access to the Internet on access to finance of small and micro businesses. Our empirical results confirm the positive role played by access to the Internet in alleviating financing difficulty of those firms. Moreover, we also found evidence that access to the Internet can reduce borrowers’ dependence on physical branches of banks when making bank choice decision for loan applications. Our evidence also implies that access to the Internet is conducive to the sustainable development of small and micro businesses via mitigating their financing difficulty.

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