Financial Constraints, Institutions, and Firm Productivity: Evidence from China

ABSTRACT

This paper investigates whether Chinese firms utilize trade credit as an alternative financial intermediation to alleviate financial constraints, and whether trade credit matters for firm productivity. The results show that trade credit significantly affects firm productivity in private and foreign-owned firms but not state-owned enterprises, indicating that trade credit is an efficient financial intermediation for non-state firms. Second, trade credit better helps firms that have severe financial constraints grow. Third, the mechanism of trade credit and TFP is by the substitution effect of cash flow, the smoothing effect of working capital and the drive of innovation. Finally, the impact of trade credit on productivity is driven by the regions under a more institutionally developed environment.

KEY WORDS:

• financial constraints
• firm productivity
• institutions

Acknowledgments

We are grateful to the participants of the “China Economic Growth and Cycle Forum”. Wang acknowledges financial support from The Ministry of Education of Humanities and Social Science (18YJC790154), The Ministry of Education of Humanities and Social Science (18YJC790212) and Youth Project and the National Natural Science Foundation of China (Project No: 71303105).

Notes

1. Due to the serial correlation of TFP (TFP follows a first-order Markov process (Levinsohn and Petrin 2003)), lagged TFP should be included to control for this problem.

2. All variables used in this paper are defined in Table A1.

3. Our data have been deflated by the deflators taken from the China Statistical Yearbook (various issues) published by the National Bureau of Statistics of China. We use the provincial capital goods deflator to deflate the capital variable and the gross domestic product (GDP) deflator to deflate other variables.

4. The GTA database’s full name is “China Non-listed Enterprise Database”, collected by “GTA Information Technology Company”, which covers 41 manufacturing industries and includes firms with annual sales over five million yuan (approximately US $650,000) from 1998–2009. The total number of firms is over two million, and 101 variables, including firms’ basic information and financing information, are increased in this database. Because our main explanatory variable is denoted by accounts payable, which begins from 2004, our data sample’s time period is 2004–2009.

5. This distribution is consistent with Chen and Guariglia 2013.

6. This is consistent with Guariglia et al. 2011; Ding et al. 2013.

7. Our SA index confirms that Chinese firms face financial constraints, but state- and foreign-owned firms tend to face less severe ones (Chen et al. 2008; Chow and Fung 1998; 2000; Guariglia et al. 2011; Héricourt and Poncet 2009; Poncet et al. 2010; Cull et al. 2015).

8. This result can support some previous studies by illustrating trade credit is an efficient financial tool in China, such as Brandt and Li 2003; Ge and Qiu 2007; Lin and Chou 2015.

9. Cull et al. (2015) also find trade credit is not sensitive to state-owned enterprises’ investment behavior.

10. Trade credit positively and significantly affects firm productivity (TFP regressed by the fixed-effect method) on collectively, privately and foreign-owned firms but not on state-owned enterprises.

Additional information

Funding

This work was supported by the The Ministry of Education of Humanities and Social Science Youth Project [18YJC790212]; The Ministry of Education of Humanities and Social Science Youth Project [18YJC790154]; the National Natural Science Foundation of China [71303105].