Credit Allocation and Firm Productivity Under Financial Imperfection: Evidence from Chinese Manufacturing Firms

ABSTRACT

The role of the financial system, especially the credit market, in productivity enhancement has interested many researchers. However, how credit allocation affects firms’ productivity in emerging economies remains unanswered. Using data from the Annual Survey of Industrial Firms (ASIF) during 1999–2007, this article examines whether credit allocation impacts Chinese firms’ productivity under financial imperfection. Our results show that the size of credit market has no influence on Chinese firms’ total factor productivity (TFP), while allocating more credit to non-SOEs significantly promotes firm TFP. Our further analysis shows that firms which are less subsidized, smaller, more external financially dependent, and more labor intensive are affected more by credit allocation. As China is the largest emerging economy, our analysis also sheds light on the development of firms in emerging economies.

KEY WORDS:

• credit allocation
• financial depth
• firm TFP
• heterogonous effects

JEL CLASSIFICATION:

• D24
• G21
• O12

Acknowledgments

We would like to thank Xun Zhang, the two anonymous referees and the editor Ali Kutan for their comments and suggestions. All the remaining errors are ours.

Notes

^1. In the finance and growth literature, it is common to analyze how country-level or region-level financial factors affect firms’ behavior. Among the articles we cite, King and Levine (1993b), Rajan and Zingales (1998) and Amore et al. (2013) conduct cross-country analyses and investigate how country-level financial development affects firms’ behavior. Hsu, Tian, and Xu (2014) and Krishnan, Nandy, and Puri (2015) analyze how state-level credit supply affects publicly traded manufacturing firms’ innovation and small firms’ productivity in US, respectively.

^2. Please refer to Section 3.1 for a detailed description of the index.

^3. In Section 3.2 we provide the reason for sample period selection.

^4. As firms’ TFP is an output of firm’s operation, while, credit is an input, it makes more sense that the lagged (beginning-period) credit allocation affects firms’ TFP.

^5. Please see the third paragraph for the detail.

^6. We use the Levinsohn and Petrin (2003) method to estimate TFP for each firm with revenue, employment, fixed assets, and intermediate inputs.

^7. The NERI index describes many aspects of the Chinese economy, including the government, banking market, legal environment, economic structure and trade barrier. Please refer to for description of the data in English.

^8. The province-level credit allocation is constructed by Fan, Wang, and Zhu (2011), and the province-level financial depth and control variables are from the China statistical yearbooks in each year.

^9. For example, we construct the real capital stock by adopting the approach developed by Brandt, Van Biesebroeck, and Zhang (2012), which is used to estimate firm TFP.

^10. It is calculated as 3.16*0.0031*100%.

^11. This is calculated as 0.0031*0.7/0.04*100%.

^12. The seven regions are east China, central China, north China, south China, east and north China, west and south China, and west and north China.

^13. Please see the first paragraph in Section 4.3.3.1 for the detail.

^14. Here, we cannot include province and year FE in our estimation, since our key explanatory variables are by province and year.

^15. The measure is averaged over 1999–2007 for the median firm in each industry (Manova 2013).

^16. The dummy is equal one if the firm is in an industry with leverage ratio above median level, zero otherwise.

^17. The measure is averaged over 1999–2007 for the median firm in each industry.

^18. Similar to the analysis of external financial dependence, we cannot introduce an interaction between firm-level labor-capital ratio and credit allocation to our regression directly due to the endogenous concern that financially constrained firms with high TFP will choose to engage in the labor-intensive activities (Song, Storesletten, and Zilibotti 2011).

Additional information

Funding

Supported by the Fundamental Research Funds for the Central Universities, JBK1801023.