The Influence Of Informal Finance On Local Private Enterprises' Performance

Since the adoption of reform and opening up and socialist market economy system,private enterprises have increasingly played a vital role in the development of Chinese economy,and become one of the strong momentums in national economy growth.Considering the gradually matured Chinese capital market and continued slowdown in economic growth,private enterprises are given great attention in its role to stabilize financial environment and maintain a sound development in Chinese economy.However,it has not been a long time since China adopted socialist market economy system,thus financial institutional environment is still under improvement.It is difficult for SMEs in financially-underdeveloped area to get credit support from formal financial institutions,which causes insufficient working fund,thus the on-going project will be suspended,capital chain will broke and enterprise will go bankrupt.Under such circumstances,informal finance became popular among private enterprises in order to survive.The studies of informal finance's influence on the private enterprises have been conducted for a long time,and yet controversy still exists.However it is quite a fresh angle in recent years to conduct this study from the perspective of institutional environment,which is the novelty of this paper.The research data are based on the survey result of the key project from NFSC---Informal Finance Risk:Transition Regional Disparity and Governance.Both qualitative and quantitative analyses are adopted in this paper.Theoretical analysis is illustrated and reasonable assumption had been made in the third part,followed by MLR calculation to empirically testify the assumption in the fourth and fifth part and,in the end,generated the correlation between informal finance,institutional environment and growth of private enterprises performance.The study had found that the poorer institutional environment is,the more private enterprises are prone to finance through informal tunnel.It is also found that although informal finance had given SMEs more options to collect fund and temporarily eased the finance problems,it had posed negative influence on the performance of private enterprises because of the lack of transparency,uncontrollable legal,political and high interest risk.Based on this result and institutional factors,this paper discusses different influences posed on SMEs performance growth in different institutional environment,and by organizing and summarizing the existing documents as well as empirical test on the data,the paper comes to the conclusion:If the informal finance could be restraint by a sound institutional environment,its negative influence will be dramatically mitigated.The study provides several ways to improve the institutional environment:improve laws and regulations and make policies to support the development private enterprises,and provide transparent sufficient public governance and reasonably allocate financial resources,reduce information asymmetry,spend more on advertisement and establish formal financial regulations to introduce folk capital to the capital market,establish credit and risk evaluation mechanism to balance the institutional difference between regions.In addition,to combine informal finance with formal finance could be another way to provide diversified financing tunnels for private enterprises,which could ensure a healthy and reasonable development of informal finance,and help reduce its bad influence on local private enterprises.