Unperfected Financial Market,Financial Heterogeneity And Firm’s Internationalization

In the1990s, Chinese government has begun to promote national development strategies for enterprises called "Go abroad". According to WTO report, China surpassed US as world’s largest trading nation in2013. The annual total import and export in China exceeded400trillion for the first time, of which export was$2.21trillion, and import was$1.95trillion. At the same time, along with the more government policy and stronger competitiveness of enterprises, Outward Foreign Direct Investment (OFDI) has gradually become an important mode of internationalization of Chinese enterprises.Although the government vigorously advocates internationalization, the supporting financial system is still in the lag phase. In the transition phase, Chinese companies not only access to financial resources in the face of the general sense of financial friction of market, but also other complex factors caused by China’s incomplete financial system."Ownership of credit discrimination" from planned economy remaining issues, relational social structure resulted in different conditions of corporate financing and a wide range of financial market segmentation phenomenon all have an impact on the behavior of firms’internationalization. WTO Report (2013) pointed out that a country’s institutional environment (including the economic system, political system, social structure, etc.) are also important factors affecting firms’internationalization in a country, and sources of comparative advantage. Because of this, the behavior of firms’ internationalization and trade liberalization has gradually become the focus of attention of domestic and foreign scholars in the case of incomplete financial markets.With the development of the new new trade theory, traditional neoclassical trade theory based on the comparative advantage and new trade theory based on economies of scale and product diversity has been challenged. Heterogeneity trade theory reveals the reasons of international trade from the firm level. It stressed the heterogeneity between firms’ productivity. When firm exports, they will face of amount of fixed costs, including access to external market information, consumer preferences in target country and establish distribution channels. Therefore, only the most productive firms engage in export by overcoming high fixed costs. Development of international trade theory also contributed to evolution of the study of financial factors and firms’ internationalization. Domestic producers and exporters routinely rely on external capital because they have to incur substantial up front costs that cannot be financed out of retained earnings or internal cash flows from operations. Moreover, exporting is associated with additional upfront expenditures that make production for foreign markets even more dependent on external financing than manufacturing for the home country. Especially after the2008financial crisis, more and more research focused on investigation of financial factors on the real economy. The collapse of global trade and foreign direct investment is not only a decline in external demand, but more severe external financing situation is also one of the important reasons.This paper discusses the interaction between the unique phenomenon of incomplete financial system (including ownership, relationship social structure and financial market segmentation) and financial heterogeneity impacting on the firms’ internationalization. It helps to explain the different phenomenon, which is not exactly the same as predicted by heterogeneity trade theory (or so-called "Chinese Paradox"). This article combines the trade issue of outside the boundaries with the institutional issues of within the boundaries in China together. These results have important policy implication for the transition of financial institution and economic system.This paper is composed of seven chapters. In Chapter1, I introduce the main research contents and the structure of the paper. In Chapter2, it is the literature review. I elaborate the model to analyze the financial heterogeneity and firms’ internationalization and map the theoretical results into empirical strategy in Chapter3. In Chapter4,1focus on the impact of ownership factors on firms’trade and explain the reason of "Export Paradox" in China. I investigate how affiliation of private enterprises and government effect firms’internationalization by interacting with financial factors in Chapter5. In Chapter6, the research is about the relationship of financial heterogeneity and firms’trade under financial market segmentation and credit discrimination in China. We provide concluding comments in the closing Chapter7.Bases on theoretical and empirical analysis, my conclusions are:first, external financial capacity is not only the important reason for firms’internationalization, but also has impact on the proximity concentration trade-off. The firm with weakest external financial capacity serves only the domestic market, that firm with relatively stronger external financial capacity export, and that firm with strongest external financial capacity engages in FDI. Second, state-owned enterprises’significant advantages in financing and non-productivity make up for the shortcomings of productivity. It leads to state-owned enterprises more likely engaging in export than private enterprises, which is also the reason for "Export Paradox" in China. Meanwhile, political affiliation expands the financial heterogeneity of private enterprises and plays a significant positive role in promoting export. Third, financial friction does not necessarily hinder trade’s flow. When financial friction is mainly expressed by financial markets segmentation and credit discrimination, the totally effect on export is decided by the trade-off of two parts. However, the positive effect on export caused by credit discrimination is kind of deformity prosperity, which definitely bring significant welfare losses to our society. Finally, in generally, with the development of China’s economic system restructuring and financial market reforms, the impact of state-owned enterprises’ partiality of credit discrimination and financial heterogeneity caused by political affiliation on export is gradually reduced. The mode of distortion resource allocation began to loosen.