Nottingham Centre for Research on
Globalisation and Economic Policy (GEP)

GEP 11/09: Financial constraints and firm productivity in China: do liquidity and export behavior make a difference?

Summary

We examine the links between Chinese firms’ productivity and the availability of internal finance. We find that, especially for illiquid firms, productivity is strongly constrained by the availability of cash flow. Furthermore, we find higher sensitivities of productivity to cash flow for private exporters, but lower sensitivities for foreign exporters.

Abstract

Financial factors have been found highly important in influencing firms’ real activities and in promoting aggregate growth. Yet, the linkage between finance and firm-level productivity has been overlooked. We fill this gap in the literature using a large panel of Chinese manufacturing firms over the period 2001-2007. We find that, especially for illiquid firms, productivity is strongly constrained by the availability of internal finance. Furthermore, we find higher sensitivities of productivity to cash flow for private exporters, but lower sensitivities for foreign exporters. Our results are robust to estimating a TFP model and a production function augmented with cash flow.

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Authors

Minjia Chen and Alessandra Guariglia

 

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Posted on Wednesday 1st June 2011

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