Financial Contract Enforcement,funding Cost And Industry Structure

In the past 30 years,although relying on cheap labor,relaxed environmental constraints and export-oriented economic policy,China is starting stepping from lowerincome nation into medium-income nations.However,the traditional growth mode has been challenged by environmental constraints,weak external demand and excessive production capacity,China’s economy bid farewell to the rapid growth,China’s economy has entered into the new normal of medium-level growth.In the new normal,China needs to transform labor-intensive manufacturing to high-added value sectors.Therefore,China has a strong desire to update industry structure.Although China has made great progress in the construction of "hardware" in the business environment such as infrastructure,there is still a lack of "software" in the business environment.One of shortcomings is the inefficiency of financial contract enforcement.From the international perspective,China ranks 128 th in contract enforcement in the world,not only lower than the OECD countries,but also lower than some BRICs such as South Africa,India and Brazil.From the provincial perspective,although the provinces of China comply with the same legal system,but because of the difference in geographical environment,historical traditions and economic development.These factors lead to the unbalanced development of the institutional environment such as contract enforcement,one of the manifestations is that the contract enforcement of the southeastern coastal areas is significantly higher than that of other regions.In this context,China needs to strengthen the institutional construction,mining institutional dividends,through the development of "invisible" elements to achieve economic growth of power conversion.In this paper,we take the efficiency of financial contract enforcement as a starting point to study the institutional factors,to study the relationship between the efficiency of financial contracts and industrial structure.This paper argues that in the actual production process of the manufacturing sector,manufacturing enterprises can not finance the production process by themselves,they must be borrow from financial institutions for the operation,especially for the purchase or rent capital.However,enterprises may be default when they have obtained loans if the financial contract enforcement is low.To make up the loss,bank will be ask a higher interest rate,and that raise enterprises’ production cost.That is to say,the financial contract enforcement are negative related to financing cost.Then,the higher cost reduce enterprises’ investment and borrow from financial institutions,and the underinvestment is a results of incomplete contract.Moreover,because of heterogeneity in different industries,the promotion of financial contract enforcement will lead finance-dependent industry to expand more than other industries,it means that industry structure will be changed.Specifically,in a static sense,we study how the financial contract enforcement affect incumbents’ scale;in a dynamic sense,we study the effect of financial contract enforcement on quantity of firms and the growth rate of TFP.These results show: With the promotion of financial contract enforcement,finance-dependent and capital-intensive incumbents’ expand quicker,the number of firms increase more faster,and TFP increased more significantly,that is to say,the share of finance-dependent and capital-intensive will be increased.Although China’s market economy has made great progress,state-own economies(SOEs)still occupies an important place in the national economy.After we finish the research on industry structure,this paper analyses the effect of financial contract enforcement on SOEs by the framework built in previous chapters.The results show that: If financial contract enforcement constant,the share of SOE has a inverseU effect on production;with the promotion of financial contract enforcement,the optimal SOE’s share will decrease,however,because of SOEs has a duty on supplying public goods in some fields,it can not disappear completely even contract enforcement is perfect.After a series of theoretical and empirical research,the paper agure that it is the time to focus on the construction of institutions such as promote the contract enforcement and protect the property right.On a micro level,efficient financial contract enforcement will expand incumbents’ scale,encourage enterprises into the market and raise enterprises’ TFP.On a macro level,efficient financial contract enforcement help industry structure update from labor-intensive to financial-dependent and capitalintensive industry.Moreover,the promotion of financial contract enforcement is also helpful to weaken credit market segmentation,optimize ownership structure,accelerate SOEs exit competitive markets and focus themseleves on public fields.