Institutional innovation and interfirm finance: The impact of smart city pilots on trade credit

This paper examines the impact of China's Smart City Pilot (SCP) program on firms' access to trade credit. Using a multi-period difference-in-differences design and a dataset on Chinese A-share listed firms from 2008 to 2019, we find that SCP implementation significantly increases firms' trade credit financing. Mechanism analyses suggest that this effect operates through two channels: improved information environments that mitigate supplier–buyer information asymmetry, and human capital upgrading that enhances firms' operational efficiency and repayment capacity. The effect is stronger in cities with more advanced digital infrastructure and among firms with lower internal digitalization, consistent with external digital improvements substituting for firm-level weaknesses. Moreover, the effect is concentrated in non-state-owned enterprises, which face tighter financial constraints and greater reliance on supplier credit. Our findings highlight the role of institutional innovations in shaping interfirm financing and reveal a novel channel through which smart city initiatives affect corporate financial decisions. • The Smart City Pilot policy significantly increases firms' trade credit financing. • The Policy effects operate through improvements in the information and human capital. • The effect is stronger in cities with more advanced digital infrastructure. • The effect is stronger among firms with lower level of internal digitalization and among non-SOEs. • Digital transformation policies reduce financing frictions and promote financial inclusiveness.