Financial underdevelopment, distorted lending and export market survival

Abstract

This paper examines the impact of financial development on exporter survival in foreign markets with Chinese firm-level data over the period 1998–2008. We measure financial development using the size, lending efficiency, term structure of bank loans and degree of state intervention in financial resource allocation, respectively. We find that a larger scale and greater efficiency of bank lending and less state intervention facilitate while the relative abundance of long-term credit deteriorates exporter survival. These effects are more pronounced for private exporters compared with state-owned exporters. For foreign-invested exporters, weakened state intervention is of relatively great importance. We attribute this disproportional impact to the government's intervention in funding investment and the distortional lending of banks, which varies across regions and industries with different levels of presence of state-owned enterprises.

Keywords:

• financial development
• financial distortion
• export
• firm survival

JEL Classifications:

• G21
• G28
• F10
• D21

Acknowledgements

For helpful comments and suggestions, we thank two anonymous referees of the Journal, Dalia Marin, Alexander Tarasov, Colin L. Xu, Jie Zhang, audience members of the Chinese Economic Association (UK/Europe) Conference in London in April 2012 and the International Economics Workshop at the University of Munich in April 2012. The research has been supported by the National Natural Science Foundation of China (Grant No. 71202149), the Research Funding for the Doctoral Programs of Higher Education, Ministry of Education, China (Grant No. 20120004120005), the Bavarian Elite Research Grants (Bayerischen Eliteförderungsgesetz, BayEFG) and the Foundation of Humanities & Social Sciences, Ministry of Education, China (Grant No. 11YJC790154).

Notes

1. The domestic raised capital in the stock market is 5.27% of the amount of bank loans in 2009. The domestic and foreign raised capital in the stock market is only 2.72% of the fixed-assets investment. Source: National Bureau of Statistics of China, the People's Bank of China and the China Securities Regulatory Commission.

2. Traditionally, there were four mega-sized state-owned banks, which were referred to as the ‘Big Four'. After 2006, the China Banking Regulatory Commission added the Bank of Communications to the list of ‘large-sized state-controlled banks', after which the ‘Big Five' replaced the ‘Big Four' as the jargon employed in the Chinese banking sector to denote the top five mega-sized state-owned banks.

3. Jarreau and Poncet (2011) and Manova (forthcoming) examine the impact of financial development and liberalization on exports at the sector level. Berman and Hericourt (2010) investigate how the effects of productivity and firm collateral are magnified by financial development.

4. Firms are free to move across provinces so that they may face a different financial development. In the sample, each firm has a province code every year and we find that only 1.0% exporters change their provincial locations in the sample. We have obtained consistent results after removing these relocated exporters.

5. As discussed above, in China large amounts of bank loans are granted to SOEs. Thus, the SOE Pre at the province level might be highly related to provincial financial development. To avoid potential multicollinearity when including both FD and SOE Pre in the same regression models, we choose to compute SOE Pre by industry only rather than by industry and province.

6. We thank a referee for the justification of adding SOE Pre as an individual variable.

7. We also try the SOE share in terms of employment and total assets. The results are highly consistent for all the measurements.

8. Calculated by the authors based on the monthly data retrieved from the China Economic Information Database (http://www.cei.gov.cn/).

9. Ibid.

10. Surprisingly productivity is negatively correlated with export intensity, which is in contradiction with the proposition of a ‘standard' firm heterogeneity model. However this is highly consistent with the findings of Li and Yin (2010) who attribute this negativity to the low-end and less efficient assembly exports, that have a rather high presence in foreign-invested enterprises and eastern regions in China.

11. Another manifestation of financial discrimination against domestic private firms is the significantly negative sign of leverage. For private firms whose debt level is constrained by poor external financing conditions, higher leverage implies stronger social capitals and better exploitation of financing leverage to fund firm investment and growth (Ge and Qiu 2007), and therefore, can be favorable for their survival.

12. In stark comparison with SOEs and private firms, the result of H/L^*HumInt for foreign firms is universally significant in all four models. This contrast, together with the fact that 77% of export businesses of foreign-invested enterprises are OEM exporting, clearly indicates that foreign-invested firms take China as a production base and export platform and they are highly sensitive to wage cost adjustment.

13. Calculated with data from the 2008 Annual Report of the China Banking Regulatory Commission.