Mechanism Of Financing Constraints’ Influence On The Profitability Of Zhejiang Private Enterprises

The development of private enterprise is one of the most important task in thecurrent Chinese economic reform, showing a close relationship to the sustainabledevelopment of China’s economy. However, according to some investigation, most of theprivate enterprises in China is confronting with a common problem—Finance Constraint.Especially, when some private enterprises are trying to attain the loan of bank, they haveto face discrimination from the national banks comparing with the national enterprise. Atpresent, the widespread financing difficult (namely financing constraints) among privateenterprises has become an obstacle for the improvement of enterprise profitability. Theexisting literature on the impact of financing constraints on the profitability of privateenterprise mainly contain the perspective of the outside environment, seldom combiningwith the micro-perspective—the enterprise inside perspective. One of the most importantinnovation points in the paper is combining enterprise inside perspective with outsideenvironment perspective to analyze the influence of finance constraint on privateenterprise’s profitability.Since reform and opening-up policy, the private enterprise has played a importantrole in Zhejiang province’s economy, playing an active role in promoting economicgrowth, alleviating employment pressure, promoting scientific and technologicalinnovation source of financial stability and optimizing the economic structure. However,even for such a well developed province like Zhejiang, private enterprises, especiallysmall and medium-sized private enterprises, are still confronted with the bottleneck ofdevelopment—Finance Constraint. Financial difficulty has always been an obstacle forthe development of private enterprise in Zhejiang. Solving the financial constraint ofprivate enterprise in Zhejiang province is of great significance for national economicdevelopment and social stability. Based on China’s industrial database of privateenterprise of2004-2007in Zhejiang, combined with financial data of each main cities inZhejiang, this paper will explain the influence on the performance of private enterprisesfrom financing constraints. This paper will focus on such questions: is there a financeconstraint problem in private province in Zhejiang? How do finance constraints influenceon the profitability of the private enterprise? Under different financial marketenvironment, is there any change for the influence from finance constraints on the privateenterprise?The enterprise financing ability, that is, the ability to gain money from banks or other financial institutions, will absolutely affect the strength of the enterprises’ investment.Investment is the core power of enterprise development, which will in turn affect theperformance of the enterprise. Based on this situation, we put forward hypothesis1:Under the current market conditions, finance constraints hinder the improvement of theperformance of private enterprises. According to previous research, the development ofenterprises (enterprises’ profitability) mainly comes from the investment, and investmentin general can be divided into three kinds: human capital investment, structure capitalinvestment and material capital investment. Material capital, refers to the enterprise actualproductive materials, such as machine, equipments, factories, land and transportationfacilities, etc.; Capital structure is the foundation of the enterprise architecture, showability of enterprise to meet market needs, which will directly reflect the enterpriseintegration efficiency of all kinds of resources system competition ability; Human capitalconsists of the ability, knowledge, experience and attitude of enterprises’ managers andstaff as well as some skills and knowledge that the managers and staff bring to enterprises.Finance constraints make the enterprise directly reduces the investment and thus hinderthe improvement of the enterprises’ profitability. So this article puts forward thehypothesis2: Via influencing the material investment, structure capital investment andhuman capital investment, finance constraints will affect the performance of the privateenterprises. Besides, we also found that in some well developed financial markets areas,where the bank number is big and the four big state-owned Banks are not main membersin the bank market, small and medium-sized joint-stock commercial Banks also jion thefinancial market. Under such conditions, private enterprises are more likely to gain bankloan meaning that the situation of the finance constraints eased. Therefore we put forwardhypothesis3: the development of financial markets can alleviate the finance constraints,improving business performance.Through empirical analysis, the results show that:1. The majority of privateenterprises in Zhejiang province are confronted with finance difficulty in the process ofdevelopment which has seriously affected the improvement of the enterprise profitability.When the financing constraints are added one unit, the profitability of private enterpriseswill drop by1.52percent;2. Under the micro-level of the enterprise, in this paper, theempirical results show that, via the material capital investment and structural capitalinvestment the enterprise can improve their profitability. While considering the presenceof finance constraints, the degree of profitability improvement by the material capitalinvestment and structural capital investment will be reduced. However, it is strange to find that the human capital investment’s influence on enterprise profitability is not verysignificant. The result show us that finance constraints will affect enterprises’ profitabilityby influencing the material investment and structure investment.3. The development offinancial market will alleviate the influence from finance constraints on the profitabilityof private enterprises.