The "China's economic miracle" under the leadership of the Communist Party of China has always been an important topic of academic research at home and abroad, and it is the centralized embodiment and significant practical innovation of the modernization of the economic governance capacity of the Communist Party of China. Many studies have explored the causes of "China's economic miracle" from the aspects of political system, economic system, fiscal and tax system or cultural factors. The Communist Party of China has formed an efficient leadership system and governance model through continuous exploration in long-term practice.To understand the great achievements of contemporary China's economic development, it is necessary to deeply investigate the unique governance system under the leadership of the Communist Party of China. In view of this, under the framework of longitudinal governance between central and local governments, this paper summarizes the economic governance model with "target responsibility system" as the main feature, aiming to provide a new perspective for understanding "China's economic miracle".
First of all, this paper summarizes the concept and structural characteristics of "target responsibility system". "Target responsibility system" is a system which takes party and government branch organization as operation carrier and upholds the principle of equality of power and responsibility and benefit, the central government acts as the originator of the "downward decomposition" of economic and social goals, then local governments and social institutions at all levels decompose and implement the goals as the "upward responsible" contractors under administrative constraints, political or economic incentives, finally coordinate and unified to complete the targets of the system. In the system of "target responsibility", the relationship between the central government and the local government is "contract-contracting", which includes not only the top-down "constraint" effect, but also the bottom-up "incentive" feature. From the point of view of structure characteristics, the responsibility system of objectives can be divided into three main steps: setting objectives, decomposing objectives and assessing objectives. The steps of goal making, goal decomposition and goal assessment are not only gradient and gradual, but also interactive, thus forming a coordinated and unified closed loop system.
Secondly, from the perspectives of democratic centralism, Chinese-style decentralization, vertical governance system and socialist market economy, this paper analyzes the institutional basis of the effective operation of "target responsibility system" under Chinese model. First, the political foundation of democratic centralism determines the binding nature of target responsibility system. Democratic centralism ensures that the overall objectives of the central government are extended locally in a highly organized form wbhich has significant vertical constraints on local government. Second, "top-down" vertical governance ensures the cohesion of the target accountability system. Top-down performance appraisal motivates local governments to take on the central government's targets. Third, the fiscal incentive under economic decentralization strengthens the effectiveness of target responsibility system. The tax-sharing reform fully aroused the enthusiasm of local government to carry out local economic construction. Fourth, the socialist market economy system with Chinese characteristics has stimulated the creativity of target responsibility system. China's market economy system in which public ownership plays a dominant role and various forms of ownership develop side by side not only ensures that the goals set by the central and local governments can effectively play a leading role, but also gives full play to the initiative of various market entities.
Finally, this paper further analyzes the main mechanism of local government promoting economic growth through "self-motivation effect" and "yardstick competition effect" in the "top-down" target-responsibility management system. Under the vertical constraint led by the central government's target, the economic growth target is closely related to the assessment and promotion of officials. This pressure assessment system increases the government departments' pursuit of economic growth target and strengthens the "self-motivation" of local officials. In addition, competition among local governments is an important source of China's economic growth miracle. Local officials will spare no effort in economic construction and pursue higher economic growth rates in order to win the promotion tournament. Therefore, the pattern of regional horizontal competition formed under the target responsibility system not only ensures the effectiveness of the "downward decomposition" of the target, but also ensures the completion of the economic growth target.
This study provides a new idea for deepening the institutional reform of the governance relationship between central and local governments, and provides policy inspiration for the high-quality development of China's economy in the next step. First, scientific design of economic development objectives, give full play to the leading function of "target responsibility system". While the GDP-focused competition model of local officials has significantly boosted economic growth in past stages of development, it has also led to adverse effects such as overcapacity and redundant construction. Therefore, the central government should not only give full play to the overall function and leading role of "target responsibility system" when setting economic development goals, but also avoid the phenomenon of excessive overloading under the vertical management system. Second, we will promote the reform of the local government evaluation system and improve the evaluation index system. Regional performance will no longer be measured solely by GDP. Environmental protection, people's livelihood, culture and security will be taken into more comprehensive consideration, so that performance evaluation will not be based on total quantity, speed and scale, but on the quality, mode and sustainability of development. Third, we need to standardize the relationship between government revenue and expenditure at different levels and improve the governance mechanism between central and local governments. Since the tax-sharing reform, the divergence of financial resources and authority between central and local governments has intensified the function dislocation and behavior distortion of local governments. Therefore, it is necessary to speed up the construction of local tax system and enrich the revenue source of local government, and transfer part of expenditure responsibility appropriately. On this basis, the local government's intervention in market economic activities should be furtherly restricted, so as to reverse the distortion of local government's behavior under the central government-led incentive mode.
Market-oriented reform is the mainstream of China’s economic reform and basic force for sustainable economic growth. In the process of China’s marketization reform, there has always been a prominent phenomenon that the market-oriented reform process of factor market lags behind that of the product market, which named as China’s asymmetric marketization reform. Chinese scholars argue that this phenomenon is the unreasonable intervention or control of Chinese governments at different levels, which has led to the imbalance and distortion of market supply and demand in key factor markets, distorting the pricing mechanism of key factors and resulting in a negative effect on China’s economic development. Based on the typical facts of the market-oriented reform and regional economic development level, this paper constructs a partial static equilibrium model, and proposes that the lag of factor marketization relative to product marketization would lead to the decline of the enterprise’s ability to obtain profits, and weaken the enterprise’s innovation investment.
To test above hypothesis, this paper uses a reasonable instrumental variable of the asymmetric marketization effect in China’s provinces and regions. From a historical point of view, this paper constructs instrumental variable by using the proportion of the employment of Chinese owned and collective enterprises in the labor force of provinces in 1978. First, we found that the robustness experience obtained from the micro enterprise level of the manufacturing sector in this paper is that China’s asymmetric marketization reform had a signifi cant inhibitory effect on the innovation investment of micro enterprises. More specifi cally, every one percentage increase in the lag of the factor marketization relative to the product marketization would cause the per capita total innovation investment and per capita private innovation investment of manufacturing enterprises to decrease by 1.200 and 1.202 percentage points respectively. Second, compared with other ownership enterprises, the innovation investment of state-owned enterprises would not be affected by the inhibitory effect of asymmetric marketization reform. Third, relative to R&D outsourcing, asymmetric marketization reform has a more significant inhibitory effect on independent innovation in China. Forth, asymmetric marketization reform has a signifi cant inhibitory effect on both technology import and reabsorption. Last, the mechanism analysis reveals that the inhibitory effect is mainly caused by the high monopoly price squeezing the profit of the industrial sector that resulted by the government’s intervention or control of the factor market. In addition, this paper also tests the alternative hypothesis. Some scholars believe that China’s asymmetric market-oriented reform would lead to adverse selection and moral hazard behavior in the process of innovation factor resource allocation, and inhibit the innovation activities of enterprises. It finds that in areas where asymmetric marketization is more serious, the provision of government innovation subsidies can promote the innovation investment of enterprises in the region.
It is considered that the paper added a value to existing literature in follow two aspects. First, it explores how the asymmetric marketization between the process of factor market and product market affect the enterprise’s innovation investment. Second, it reveals that the asymmetric marketization would squeeze the profit obtained from production. Third, the potential direction of China’s market-oriented reform in the long run is to accelerate the measures to promote the reform in key factors market and promote the market-reform of factor prices by realizing the free fl ow of factors.
China is experiencing a critical stage of accelerated urbanization. The acceleration of urbanization and associated industrialization has become a key challenge for China to realize carbon emission peaking targets on schedule. Therefore, understanding the characteristics of China’s urbanization process, clarifying the impacts of various factors related to economic structural change on the evolution trend of carbon emissions, and identifying the carbon reduction pathway coupled with economic growth can provide prominent decision references to optimize carbon reduction policy and realize carbon emission peaking. To investigate the complex impact of urbanization on carbon emissions, this paper measures the urbanization level from two perspectives of population urbanization rate and urbanization pace, and then introduce the urbanization level as the background variable into the STIRPAT model to constructure a latent class model. Based on the above model, we discuss the dynamic impacts of urbanization and other key determinants on carbon emissions. Moreover, we design four kinds of urbanization backgrounds and three simulation scenarios to analyze the feasible pathway for peaking carbon emissions in China by employing the Monte Carlo simulation method.
The results show that GDP per capita, population density, energy intensity, and energy consumption structure have signifi cant promoting effects on carbon emissions, indicating that China’s current economic growth pattern is still energy intensive in general. From a dynamic perspective, the promoting effects of some determinants on carbon emissions tend to be weak with the improvement of urbanization level. In detail, the promoting effects of population density and energy consumption structure gradually decrease during the process of urbanization. Besides, the increase in the ratio of foreign direct investment to GDP can promote carbon emissions in regions with lower urbanization level, but suppress carbon emissions in most areas with higher urbanization levels. Moreover, only in regions with lower urbanization level, the increase in proportion of secondary industry results in more carbon emissions. The results of the scenario analysis demonstrate that under the historical benchmark scenario and the policy-oriented scenario, it is diffi cult for China to peak carbon emissions before 2030. In the context of technological breakthrough scenario and four kinds of urbanization evolution, China can peak carbon emissions at different time before 2030 with diffi cult peaking values. In addition, under the background of different levels of urbanization, there are apparent differences among the peaking pathways of carbon emissions. Specifi cally, China is more likely to peak carbon emissions under the higher urbanization level and the urbanization mode of “slow fi rst and then urgent”. Based on our fi ndings, it is suggested that a stable urbanization development strategy should be formulated, and the government should be committed to improving the low-carbon technological innovation capacity, to achieve the carbon emission peaking target as scheduled.
The contributions of this paper are as follows. First, the urbanization level is introduced as the background variable into the latent class model aiming at revealing carbon emission determinants, which can overcome the logical defect of general regression model in identifying the impact of urbanization on carbon emissions. Thus, this paper contributes to a better understanding of the impacts of urbanization on carbon emissions. Meanwhile, the model we construct can be used for reference to explore the real infl uence of various factors with background characteristics on the explained variable. Second, based on the scenario simulation analysis, this paper has a deep insight into the evolution tracks of carbon emissions under different economic and environmental policies and urbanization stages, thereby presenting the priorities of carbon reduction policy and the optimal carbon emission peaking pathway. Consequently, this paper could provide important theoretical basis and practical references for reasonable formulation and effective implementation of China’s carbon reduction policy.
Since the great Reform and Opening up in 1978, China has swiftly transformed from a traditional, closed, planned economy to a modern, open, market-oriented economy within a very short period of time, and has become well-known “world factory” and “the home to multinational enterprises”. This paper argues that Chinese diasporas and the enterprises they run have played an important role in facilitating the above transformation in mainland China. The main content of this article is as follows:
First, this paper reviews the past literature and finds that the existing research on Chinese diaspora-run enterprises (DREs) are mainly qualitative while quantitative ones are largely insufficient; the datasets used in previous research on Chinese DREs have following weaknesses: small sample size, short time coverage, outdatedness of sample, indirectness of measurement, poor representativeness of industry and scale of the firm, and shortage in variables etc.; the research on China's FDI have not yet paid attention to the particularity and importance of diaspora direct investment (DDI) among FDI.
Second, this paper summarizes the role of DREs as “pioneers” and “bridges” during development process of a regional industrial cluster based on a case study of Nan'An stone-making industry: in the early stage of industrial development, DREs overcame entry barriers with the help of lineage networks, so as to overcome the capital bottleneck of the local industrial development; after entering, DREs shared information from overseas markets to overcome market demand bottlenecks for local industries; in the later stage of industrial development, DREs helped foster a group of competitive local industrial bases through demonstration and outsourcing, resulting in the formation and growth of local industrial clusters.
Third, using a novel database constructed by Chen et al. (2022), this paper depicts the temporal, spatial, industrial and organizational characteristics of entry of the universe of all DREs in China since the Reform and Opening up. Although the proportion of DREs among all foreign enterprises showed a declining trend, but DREs has always constituted a dominant share of foreign firms in China, and there were obvious differences between DREs and non-diaspora foreign firms in terms of entry strategy, location choice, industry selection and many other dimensions. Thus, DREs and non-diaspora foreign firms may had produced completely different spillover effect.
Fourth, this paper shows some possible spillover effects of DREs during the era of Reform and Opening up via quantitative evidence including: preceding the entry of domestic private enterprises and non-diaspora foreign enterprises, promoting local participation in international trade, improving local business environment, and guiding the modernization of domestic enterprises, etc.
Finally, under international comparison, this paper derives policy implications from China’s experience with use of DDI as catalyst for local industrial development, discusses the avenue for future research, and calls for more scholarly attention on the role of DDI in promoting industrialization of developing countries.
Moral hazard issues arising from health insurance have been heatedly discussed among researchers and policy-makers. The focus of the existing literature has been on so-called “ex post moral hazard”, i.e., conditional on one’s health status, the responsiveness of an individual’s demand for healthcare to the out-of-pocket prices (Pauly, 1968). By contrast, another type of moral hazard (ex ante moral hazard), namely health insurance alters the behavior of an individual’s health investments, has received less attention in studies (Einav and Finkelstein, 2018). Following the mainstream literature, this paper also abbreviates “ex postmoral hazard” as “moral hazard”. In theory, there is no clear prediction on whether or not health insurance will increase the utilization and the costs of healthcare. A series of randomized experiments [e.g., Aron-Dine et al. (2013), Finkelstein et al. (2012), Manning et al. (1987), etc.] as well as some quasi-natural experiment studies [e.g., Chandra et al. (2010), Chandra et al. (2014), Shigeoka (2014), etc.] have provided compelling evidence of the existence of moral hazard in health insurance. Meanwhile, some studies also tend to characterize the magnitude of moral hazard by the price elasticity of demand for healthcare [e.g., Cutler and Zeckhauser (2000), Feng et al. (2020), Zhao et al. (2015), etc.]. Their estimates of price elasticity are about -0.1 to -0.7.
Therefore, it can be seen that the evidence about the magnitude and nature of moral hazard in health insurance is still limited, though its existence has reached a consensus. In developed countries, such as the U.S. and Europe, largescale health insurance expansion shocks have been rare after the 1980s. In China, however, emerging health insurance reforms and unique data provide researchers opportunities to answer new questions about moral hazard in health insurance. Based on this, this paper shows how to use China’s scenarios and data to define and discuss four research questions, which include: (1) whether monetary costs are the only source of healthcare costs; (2) whether the monetary costs of healthcare (out-of-pocket prices) faced by individuals are marginal prices(spot prices) or average prices (future prices); (3) how to distinguish moral hazard from income effects; (4) how large is the general equilibrium effect of health insurance expansion.
When talking about healthcare costs, the existing literature tends to focus only on monetary costs, without attention to time costs. In order to explore whether the time cost will affect the demand for healthcare (Question 1), we use the fact that the statutory retirement age for men in China is 60 and Urban Employee Basic Medical Insurance (UEBMI) data of male workers aged 50-70 in a city, to construct regression discontinuity models. Preliminary results show that at age 60, there is a signifi cant increase in the rate of hospitalization for men. This implies that the reduction of time costs resulted from retirement will increase the individual's demand for medical care, and thus the researchers should incorporate time costs into analyses to gain more accurate estimate of the price elasticity of demand for healthcare.
Question 2 is raised from nonlinear health insurance contracts. In order to alleviate the overuse of medical care, typical health insurance contracts often incorporate deductibles, cost limits, and other components, and also reset reimbursement annually based on a calendar year, which make patient cost sharing become a nonlinear function of the cumulative amount of healthcare spending (over the covered year). Because of it, when estimating the price elasticity, researchers need to consider whether the insured response to the spot price (i.e., current out-of-pocket price) or the future price (i.e., expected yearend price). At present, few studies can discuss the patients’ response to spot price and future price at the same time as well as compare their magnitudes. We fill this gap by designing two quasi-natural experiments, with the help of the policy for reaching the deductible in outpatient services and the accounting year reset policy of the UEBMI insured in a China’s city. In Experiment 1, only the spot price changes without changes in the future price, while in Experiment 2, both the spot price and the future price change simultaneously, which helps us jointly estimate these two price elasticities. Results show that under the nonlinear contracts, individuals respond differently to different prices: the spot price elasticity of the retired workers is about -0.09 to -0.14, whereas the future price elasticity is about -0.92 to -1.01. This suggests that researchers should incorporate individuals, dynamic incentive responses into the analysis of health insurance.
When observing the phenomenon that falling out-of-pocket prices lead to the increase in healthcare spending, most current studies generally treat it as the evidence of moral hazard in health insurance. However, the impact of price reduction on the consumption includes substitution effects and income effects. The so-called moral hazard in health insurance is the substitution effect, that is, the social deadweight loss due to price distortions. Instead, the income effect might relax the individual's liquidity constraint, which is social benefits. In order to distinguish the moral hazard effect from the potential income effect (Question 3), we exploit the changes in inpatient reimbursement and the changes in pension to construct two quasi-natural experiments, and thus decomposing the traditional price elasticity of demand for healthcare into moral hazard (deadweight loss) and the income effect (social benefit).Results from regression discontinuity design and event study approach show that, the substitution effect accounts for about 58% of the price elasticity, while the income effect accounts for about 42%. This implies that the traditional price elasticity of healthcare demand might overestimate the magnitude of moral hazard in health insurance. When assessing the welfare effects of health insurance reform, researchers should take both the social costs of moral hazard and the benefits of income effects into consideration.
In Question 4, this paper discusses the general equilibrium effect of health insurance. The existing literature often uses a partial equilibrium framework, that is, given the entire medical market remains unchanged, to discuss the impact of health insurance expansion or changes in the reimbursement rate on various outcomes. However, health insurance reforms might affect individuals’ decision making (demand side) as well as providers’ behavior (supply side). We evaluate the impact of China’s New Cooperative Medical Scheme (NCMS) expansion, and find that it not only affects individuals’ healthcare utilization and health outcomes, but also has significant impacts on the public hospitals’ income and expenditure, and increases the number of start-ups and patent applications in the pharmaceutical industry. These preliminary results suggest that the impacts of health insurance on providers’ behavior cannot be ignored. In future studies, researchers should broaden their analytical perspectives and further explore the general equilibrium effects of health insurance.
We believe that Chinese researchers can dig out newer research questions as well as fresher analytical perspectives by combining Chinese reality with big data and the latest empirical approaches. China’s stories and experiences will boost the development of literature on moral hazard in health economics and provide valuable lessons for the improvement of the health financing system in China and other countries.
On October 10 in 2010, the State Council of the People’s Republic of China issued the “Decision of the State Council on Accelerating the Cultivation and Development of Strategic Emerging Industries”. The document indicates that strategic emerging industries have important value and act as leading role in the overall economic and social situation and the country's long-term development. Although our country's policy about strategic emerging industry has been issued for more than ten years, at present, the factual analysis and mechanism research of relevant industrial policies are still lacking. We need to fi gure out how to achieve industrial success and enterprise development through policy tools.
To sum up, this paper puts forward the following research questions: What are the conditions and mechanisms for the successful industrial policy of strategic emerging industries? Specifi cally, in our country, what kind of industrial policy is needed, what is the framework of the policy system, what is the effect of policy implementation, and how to produce better industrial policies? Taking the development policies of three industries (or technologies), i.e., display, integrated circuit, and new energy vehicles (Electric vehicle) as examples, this study discusses the conditions and mechanisms for the success of strategic emerging industrial policies. Based on the method of Industrial Chain and Value-Chain Based Holistic Policy Analysis (ICVC-HPA) we put forward, this paper attempts to use the ICVC policy matrix to sort out the relationship between policies and the ICVC of the enterprises, and evaluate the industrial development level and policy effects based on representative enterprises’ scale, technical level indicators, efficiency and their subsidy data. This helps us figure out what is the focus of these policies.
Through practical research and case analysis, the study finds that firstly, industrial policy is the product of interaction between government and market and a variety of factors under certain development conditions in order to promote the development and structural upgrading of specific industries. Secondly, policies and their combinations including objectives and tools should be designed and implemented based on policy objectives, the nature of policy tools, and the characteristics of the ICVC, and they should be dynamically adjusted in due course. Thirdly, the interaction between government and enterprises is conducive and necessary to the formation and improvement of industrial policies. Fourthly, development policies of China’s three industries have been initially successful. Finally, the necessary condition for the success of the policy is that the key policy system can be reasonably integrated with the market mechanism and the needs of improvement for corporate capacity.
Compared with the existing studies, our paper contributes marginally as follows. Firstly, we find the three strategic emerging industry policies have all achieved basic success or preliminary success. The reason for the success of the policy is that the policy is forward-looking and feasible, which comes from the ambition of the state and local governments to catch up and develop, take advantage of late-mover advantages, and interact between the government and enterprises. Moreover, the combination of policies and market mechanisms make the policies succeed more easily. Finally, in terms of the method, the integrated policy analysis method using industry chain value chain analysis can help to carry out objective policy analysis, appropriate policy evaluation and targeted policy design for different industrial chain value chain links. In total, this study provides inspiration for policy evaluation and related policy design for strategic emerging industries from the perspective of policy mechanism and government-enterprise interaction.
Resolving the problem of firm’s financing barrier is crucial to China’s high-quality economic development. Digital economy has undergone rapid growth in recent years, while relevant industries has played major role in boosting economic growth and mitigating adverse impacts from the Pandemic. This paper is built on the perspective of digital infrastructure, a fundamental element of digital economy, to study the relationship between digital economy and firm’s financial constraint. In theory, the improvement of digital infrastructure can facilitate the effective handling of financial information and the efficient management of firms, hence promoting the likelihood of factor sharing within and among firms. On the other hand, the perfection of digital infrastructure helps to strengthen the firm-bank connection, resulting in a more unhindered information transfer and knowledge acquirement between borrowing firms and targeting financial institutions. Based on these concerns, we expect digital infrastructure to be useful in relaxing firm’s financing constraints.
Taking the establishment of “Broadband China” exemplary cities as a natural experiment, this paper uses data from Chinese listed companies within 2005 and 2019 to empirically study the impact of digital infrastructure on firm’s financial constraint. Results show that the policy of “Broadband China” effectively lowers the indices on firm’s financial constraint, the alleviation effect is realized via adjusting external information asymmetry and reducing internal financing costs. The results are robust to an array of sensitivity tests including the parallel trend test. Moreover, the identified financial effect of “Broadband China” policy is found to be contributed mainly by private-owned firms, firms with low leverage ratio and firms in service industry, indicating that digital infrastructure reduces “financing gap” among firms with differed ownership, corrects for “attribute misallocation” embedded in the bank-firm credit process, and facilitates the digital transformation of the third industry.
Our study provides digital-economy-based solution for firm’s problem of financing barriers, while also offers empirical evidence and policy implications for the implementation of China’s “Powerful Digital Nation” strategy. While the study has illustrated the role of digital infrastructure in financially fueling firms, government investments should be more emphasized on projects with digital factors, and lower the financial barriers for firms via assorted digital based guidance. Meanwhile, firms pursuing a strong comparative advantage are encouraged to embrace the new digital era by adopting more digital-oriented development strategy.
“Demographic dividend” has played a very important role in China’s rapid economic growth in the past. However, China has started the process of population aging in the 21st century. By 2010, China’s economic growth has appeared an “inflection point” from high speed to medium and low speed. Does this mean that China has lost its demographic dividend?
As a country with a large population, how to make full use of human resources and how to sustain the demographic dividend has become a crucial practical problem. This paper aims to demonstrate the existence of “demographic health dividend” and it is an important source of promoting economic growth. The traditional connotation of “demographic dividend” means that the demographic structure dominated by the “quantity” of labor force provides favorable conditions for economic growth. In this connotation, the factor of “quality” of labor force is not considered.
Obviously, the effect of labor force with the same quantity but different quality on economic growth must be different. Among the indicators to measure the quality of labor force, health has special importance. Without health, other indicators for evaluating population quality have no practical significance. Therefore, this paper puts forward the population health factor as a relatively independent problem, that is, the problem of “demographic health dividend”.
By establishing a mathematical economic model containing total output, national savings rate and demographic structure variables, and using the method of theoretical derivation and econometric analysis, this paper makes an in-depth research on the relationship between demographic health dividend and economic growth. The research found that in the process of economic growth, there is not only “demographic dividend”, but also “demographic health dividend”, in which the demographic health dividend is composed of labor health dividend and elderly health dividend.
In particular, this paper deduces the formula of the relationship between national savings rate and demographic structure, explains the connotation of demographic dividend mathematically based on this formula, and proves theoretically that improving demographic health level has the effect of continuing demographic dividend; It is proved mathematically that demographic health dividend is the source of economic growth, which enriches the theory of economic growth. This paper demonstrates that developing demographic health dividend is an important way to actively deal with population aging meanwhile it has an important practical significance of implementing the “healthy China” strategy. Finally, policy suggestions are put forward. The conclusion of this paper shows that the characteristics of China’s economic growth are closely related to the characteristics of China’s demographic structure.
Over the past several years, China’s OFDI has increased signifi cantly. According to the 2019 Statistical Bulletin of China’s Foreign Direct Investment, China’s OFDI increased to US$1.98 trillion, ranking 3rd globally. OFDI can help enterprises to improve their technology, avoid trade barriers and make use of foreign resources. Many scholars studied OFDI and found that several factors can promote OFDI, such as minimum wage, domestic system, productivity and so on. With China’s economic development, the RMB has seen consistent appreciation over the years. According to the International Monetary Fund (IMF), the exchange rate between USD and RMB dropped from 8.277 in 2001 to 6.897 in 2019. As one of the important ways to utilize international resources, OFDI profoundly affects the development of enterprises. At the same time, the RMB exchange rate measures the relative prices of goods and factors between China and other
countries. It presents the cost changes of Chinese enterprises’ investment in the international market and plays an important role in OFDI decisions. With the implementation of exchange rate reform, the RMB exchange rate has moved more frequently and market-oriented since 2005. In this circumstance, it is necessary to analyze the impact of RMB appreciation on enterprises’ OFDI.
We analyze the impact of changes in the exchange rate on OFDI theoretically and empirically. Drawing on the research of Fan et al. (2018) and Tian and Yu (2020), we fi nd that the appreciation of the local currency decreases the threshold for OFDI and promotes OFDI. In addition, appreciation of the local currency expands the profit difference between OFDI and export, which increases the potential for enterprises to conduct OFDI, especially for enterprises with low productivity. Then, we constructed a comprehensive database using data from the “List of Overseas Investment Enterprises (Institutions)” provided by the Ministry of Commerce of China, the China customs database, and the Annual Survey of Industrial Firms (ASIF). Using the method of Xu et al. (2016), we constructed city-level effective exchange rates. After controlling fi xed effects and city-level and enterprise-level control variables, we estimated the effect of the exchange rate on China’s OFDI empirically. We found that every 1% RMB appreciation led to a 0.0102 increase in OFDI during the period 2001–2012. As ASIF only covers large-scale industrial enterprises and cannot fully illustrate all the behavior of all Chinese enterprises, we estimated the effect of the exchange rate on the amount of provincial OFDI using the “List of Overseas Investment Enterprises (Institutions),” which contains the full OFDI records. Then, we found that for every 10% RMB appreciation, there was a 0.004% increase in the provincial OFDI number, further consolidating our conclusion.
Compared with previous studies, our study makes the following contributions. First, different from previous studies that analyzed the effect of the effective exchange rate at the macro or enterprise level, we constructed city-level effective export and import exchange rates and examined the effect of exchange rate on OFDI. Compared to national exchange rates, our data provides more city information. Meanwhile, our exchange rates are less susceptible to industry chain effects than firm-level exchange rates. Due to the existence of the industrial chain, the production and business activities of enterprises tend to be affected by upstream and downstream enterprises. The effect of exchange rates on OFDI in upstream and downstream enterprises may also indirectly affect enterprises’ OFDI behavior. Second, unlike previous micro-level studies that only focused on manufacturing enterprises, we analyzed the impact of RMB appreciation on all OFDI records. Therefore, compared with other research, our research is more comprehensive and representative.
This paper focuses on the losses in total factor productivity (TFP) due to capital misallocation to dispersion in firm-specific borrowing costs in China. That is to say, the private-owned enterprises (POEs) face higher borrowing costs than the state-owned enterprises (SOEs) with lower productivity. For one thing the differences in borrowing costs across firms may attributable to the relatively undeveloped financial markets in China. Specifically, there are frictions between banks and entrepreneurs as well as banks and depositors which arising from information asymmetry in China's credit markets. From the credit demand side, since the default cost generates a borrower spread, POEs whose financing choices are affected by the higher default costs face higher lending rates than SOEs with the lower default costs. Thus different entrepreneurs differ in their default costs lead to borrower spread differ across sectors , which means that the financial demand frictions lead to reductions in TFP through capital misallocation. From the credit supply-side, the financial intermediary may divert a fraction of assets leads to an endogenous the aggregate amount of credit loan constraint for banks which generates a lender spread. Thus the total loans funded will depend positively on the banks’ own net worth, and the banks are more unwilling to extend credit to POEs due to the higher default costs. Hence, the financial supply frictions would exacerbate the capital misallocation arising from financial demand frictions. For another thing, government implicit guarantees may be another important determinant of differences in borrowing costs across firms. To achievement some policy goals such as stable economic growth, the production decision of SOEs should be countercyclical. So the SOEs generally receive some preferential credit treatment through the government guarantees. That is to say, the government provides implicit guarantees for bank loan to SOEs and bails the potentially defaulting SOEs out and pays off the loan partly or fully. Thus SOEs’ borrowing costs have been affected less by the financial factors which exacerbates capital misallocation.
Therefore the paper firstly incorporates government-guaranteed bank loans and double financial frictions into a dynamic stochastic general equilibrium (DSGE) with production heterogeneity wherein both bank and entrepreneurial leverage matter for the cost of external funds of nonfinancial firms borrowing from banks. By analyzing the determinants of external financing premium including borrower spread and lender spread, it has been found that: Firstly, the model economy can better account for structure of economy and business cycle in the China's actual economy. Secondly, changes in financial frictions induce heterogeneous responses capital wedges across firms, which reduces the efficiency of capital allocation across firms and aggregate TFP, and SOEs have been affected less by the financial factors since the government provides guarantees for their debt which exacerbate capital misallocation. Thirdly, the impacts of the adverse shocks on the real economy have been double enhanced through linkage of bank and entrepreneurial leverage, while the financial supply frictions constrains bank’s ability to provide loans and thus exacerbate capital misallocation through reducing the available bank loans for POEs. Additionally, the model endogenously generates the counter-cyclicality of capital misallocation. Fourthly, during the economic downturn, the extent of capital misallocation will be exacerbated since the conditions of access to credit for POEs are more difficult and the production decision of SOEs is countercyclical.
The contributions in this paper can be summarized as follows: Firstly, the paper constructs a DSGE model which integrates government-guaranteed bank loans and double financial frictions into a unifi ed research framework for the first time. The government-guaranteed bank loans are adopted by the research Group of Operations Office of the People’s Bank of China (2017), the double financial frictions are constructed by adding a moral hazard problem between bankers and households along the lines of Gertler and Karadi (2011) to the Bernanke et al. (1999) financial accelerator model, and then the two frictional associations are constructed by using the bank credit scale variable as a link. Secondly, from the perspective of comparative static and dynamic analysis, the paper inspects the mechanism of the losses in TFP through capital and credit misallocation arising from the double financial frictions and implicit government guarantees. Thirdly, in the context of the economic downturn, the paper inspects the mechanism of capital misallocation by the conditions of access to credit for POEs are more difficult and the production decision of SOEs is countercyclical.
Finally, this paper suggests that, to solve the capital misallocation arising from imperfect financial markets, the government should to alleviates the information asymmetry among different economic agents including banks and entrepreneurs as well as banks and depositors; To solve the capital misallocation arising from the government-guaranteed bank loans, the government should to build the system of the state-contingent government-guaranteed bank loans to SOE firms on business cycle.
