Effects of Bank Branch Competition on Rural Firm Entry and Exit: Evidence from Hokkaido, Japan

Abstract

This paper investigates the effects of bank branch competition on rural firm entry and exit in Hokkaido, the largest and northernmost prefecture in Japan. Using a panel dataset of 188 municipalities, we run a two-stage least squares regression to examine whether banking competition affects firm entry and exit, respectively. Although the empirical evidence does not strongly support the notion of simultaneously linked firm entry and exit, banking competition has a negative effect on firm exit rates. Furthermore, consistent results are obtained when running a seemingly unrelated regression. Our findings suggest that fierce competition among banks does not contribute to firm survival and region-based relationship banking in less competitive areas can deter firm exit.