Title:
Rethinking Regional Growth Drivers: Innovation, Finance, and Real Economy in Henan, China

Authors:
Yantong Guo*, Ooi Kok Loang，Nor Fairuz Syazana binti Nor Fauzi, Malaysia

Abstract:

This study investigates the relationships technological innovation (TI), financial development (FD), and the real economy (RE) in Henan Province, China, using annual data from 1999 to 2023. A Vector Autoregressive (VAR) framework with Granger causality tests, impulse response analysis, and variance decomposition is employed to examine both short term dynamics and long-term linkages. Robustness is confirmed using a Bayesian VAR with Minnesota priors. The findings indicate a two-way causal relationship between financial development and the real economy, where finance initially stimulates real sector growth but its influence weakens over time. In contrast, the real economy exerts a more sustained effect on finance, suggesting a crowding out mechanism caused by capital misallocation. Technological innovation shows a limited contribution to real economic performance, explaining less than two percent of its variance. These results highlight inefficiencies in credit allocation, weak diffusion of innovation, and low absorptive capacity within Henan’s industrial structure. Policy measures should focus on channeling financial resources toward productive sectors such as high technology manufacturing, enhancing innovation financing mechanisms, and strengthening R&D industry collaboration.

DOI: https://doi.org/10.51505/IJEBMR.2025.91218