Chinese Defense Industry Reforms and Military Firm Performance: Evidence from the Civil—Military Integration Strategy

ABSTRACT

In March 2015, the Chinese government initiated an important reform program targeting the defense industry, namely civil–military integration (CMI), with the objectives of introducing military technologies to the civilian market and infusing private capital into military enterprises. On examining this unique exogenous shock in a 2007-2017 sample of Chinese A-share listed firms, we identify the following effects of CMI on military firms’ performance. (1) The market value of military firms significantly increases after the establishment of the CMI policy in 2015 and the market value of military firms is on average 6.682% higher after 2015. (2) This effect is robust to propensity score matching, instrumental regression, alternative measures of corporate market value. (3) The positive impact of CMI on military listed firms’ market value is stronger for firms with lower innovation ability and weaker corporate governance, suggesting that the CMI policy can improve the research and development abilities and ease the agency conflicts of military firms. (4) After 2015, military firms with weaker financial constraints and those located in provinces with lower marketization levels perform better. Overall, offering a micro-perspective on military firms, this paper complements the growing literature on defense economics and clarifies how CMI improves military firms’ performance.

KEYWORDS:

• Civil–military integration
• military firm performance
• quasi-natural experiment

JEL CLASSIFICATION:

• C3
• G3
• M4

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1. Global defense spending in 2019. The US (US$732 billion) ranks first and China (US$261 billion) ranks second in terms of military spending. Source:

https://xw.qq.com/cmsid/20200430a09mlp00.

2. Data for all countries from 1988–2020 military expenditure in constant (2019) USD. Source: https://www.sipri.org/databases/milex.

3. Thanks for reviewers’ comments. The S&P 500 Index includes 500 representative listed companies in the United States. These listed companies are widely distributed in the major stock exchanges of United States, such as New York Stock Exchange, Nasdaq etc. The S&P 500 index is a market value weighted index, which is widely accepted as an ideal proxy for the total U.S. market and can reflect the movements in the stock markets worldwide.

4. Data of national demonstration zone for CMI innovation. Source: https://www.sohu.com/a/238407296_655347.

Additional information

Funding

This research was funded by the National Social Science Foundation Project of China (Grant No. 20CZZ024).