Financial constraints and firm productivity: Evidence from Chinese manufacturing

Man Jin, Shunan Zhao and Subal Kumbhakar

European Journal of Operational Research, 2019, vol. 275, issue 3, 1139-1156

Abstract: This paper explores the link between financial constraints and productivity using firm-level data from Chinese manufacturing industries. Based on a dynamic optimization model which provides a direct measure of the degree of firms’ external financial constraints, we endogenize the relationship between firms’ financial constraints and productivity through the research and development (R&D) investment channel. We resolve the simultaneity issues in the estimation of productivity with the proxy variable method. Using an unbalanced panel including 312,534 Chinese manufacturing firms over the period 1998–2007, we find that about 90% of firms face external financial constraints and the state firms are much less constrained than the non-state firms. We hypothesize that financial constraints have two opposite effects: (i) they raise productivity by reducing “sub-optimal” investment, and (ii) they reduce productivity because the paucity of funds reduces productivity-enhancing investment. Consistent with our hypothesis, we find an inverted U-shaped relationship between financial constraints and firm productivity. If the level of financial constraints for a typical unconstrained firm is adjusted to the productivity-maximizing level, its productivity will increase by 11% in the short run and 16% in the long run after controlling for firm specific characteristics. The empirical results are robust when we control for the sample selection issue in the estimation of productivity.

Keywords: Finance; Credit constraints; Production function; Productivity; R&D investment (search for similar items in EconPapers)
JEL-codes: D24 E22 G0 O16 O3 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221718310488
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:275:y:2019:i:3:p:1139-1156

DOI: 10.1016/j.ejor.2018.12.010

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().