Bank size or distance: what hampers innovation adoption by SMEs?

A growing body of research is focusing on banking organizational issues, emphasizing the difficulties encountered by the hierarchically organized banks in lending informationally opaque borrowers. While the two extreme cases of hierarchical and non-hierarchical organizations are typically contrasted, what shapes the degree of hierarchy and how to measure it remain fairly vague. In this article, we compare bank size and functional distance between bank branches and headquarters as possible sources of organizational friction studying their impact on the likelihood of small firms introducing innovations. Our results show that small and medium enterprises (SMEs) located in provinces where the local banking system is functionally distant are less inclined to introduce process and product innovations, while the market share of large banks is only slightly correlated with firms' propensity to introduce new products.