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Remote markets as shelters for local distortions: Evidence from China

Mohan Zhou, Faqin Lin () and Tan Li

China Economic Review, 2016, vol. 40, issue C, 241-253

Abstract: We study how the presence of state-owned enterprises (SOEs) distorts private firms' decision on interprovincial sales in China. Using data from World Bank Investment Climate Survey and Annual Survey of Manufacturing Firms in China, we find evidence that the prevalence of SOEs in a city-industry where private firms reside will affect these firms' decision on the allocation of sales between interprovincial markets versus adjacent market. The direction of the effect on private firms, however, depends crucially on the private firms' access to credit. Specifically, the prevalence of SOEs leads to a higher propensity to sell to remote markets for firms with adequate financial access, whereas the opposite is true for firms who are credit constrained. We build a parsimonious model which links political/market distortion, market access, and credit constraint to explain these patterns, and argue that remote markets can serve as shelters for local distortions resulted from SOEs presence for some private firms.

Keywords: Financial constraints; Political distortion; Private firm; Sales distribution; China (search for similar items in EconPapers)
JEL-codes: F14 P16 P31 P33 (search for similar items in EconPapers)
Date: 2016
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China Economic Review is currently edited by B.M. Fleisher, K. X. D. Huang, M.E. Lovely, Y. Wen, X. Zhang and X. Zhu

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