Financial Constraints And Chinese Firms' Exports

In this paper I examine the effect of financial constraints on the choice of the export destinations,the domestic export value added ratio(DVAR)and the quality dispersion of export products.This paper draws on highly detailed panel data from China Customs Trade Statistics,China's Annual Survey of Industrial Firms and the WDI Database.I use exogenous shocks such as entrance into SEZs as well as the China's 2004 VAT reform to identify the effect of financial constraints on the financial status of affected firms as well as their export behaviors.First,I find that the export market pecking order among Chinese firms exists.Firms are more willing to export to economies with higher market potential after their financial constraints are alleviated.The analysis of market potential shows that population and transportation costs of destinations are key factors in determining the export preference of firms,whereas the effects of income per capita,government performance and logistics efficiency of the destinations on market choices are statistically insignificant.Subsample analysis suggests that the export market preferences exists among the following types of firms: multi-product firms,large and medium-sized firms,and medium/high-tech firms.Such pecking order is not significant in other types of firms.Second,this paper explores the effect of VAT on domestic export value added ratio(DVAR)at firm level where VAT is incorporated in a theoretical model to analyze its distortion on intra-firm resource allocation.I utilize China's 2004 VAT reform as an exogenous shock to identify the effect of the reform on both firm level effective VAT rates and the DVAR.Empirical results show that the reform has significantly increased the firms' export DVAR by lowering the effective VAT rates of the affected firms,which confirm the findings of our conceptual framework.I also find that the effect is stronger for large or medium sized firms than small firms due to the existence of small tax payers in China's VAT regime.Firms with high industrial concentration respond more than others.I provide model and evidence suggesting that the 2004 VAT reform has alleviated the financial constraints of affected firms by allowing deduction of the fixed asset expenditures,which provides firms with extra cash flow to increase their capital-labor ratios as well as their DVAR.Third,this paper also estimates and analyzes China's export quality dispersion across destinations and the quality dispersion within destination across products at firm level between 2000 and 2006.The data suggests that the quality dispersion of China's general exports has increased year by year.On average,the quality dispersion within destinations is higher than the dispersion across destinations.The data suggests a significant positive effect of the alleviation of financial constraints on the quality dispersion within destinations and at the aggregate firm level.This effect is statistically insignificant towards dispersion across destinations.Subsample analysis shows that the effect exists among the following types of firms: small and micro scale firms and firms from medium and low technology-intensive industries,whereas the effect is insignificant among other type of firms.The alleviation of financial constraint will increase the degree of quality dispersion mainly by expanding the product scope of firms.However,the alleviation of financial constraint may also cause firms to over-embed in the GVCs,which will curb the rise in quality dispersion and may lead to the “quality lock-in” effect.