The Affecting Factors Of Industrial Structure Upgrading In Middle-income Countries

Middle-income countries comprise an important group within developingcountries. Most of them share the same goal and direction to get ranked among thehigh-income countries by maintaining sustainable growth. The historical experienceshows that, compared with the process to transfer from low-income countries tomiddle-income countries, it takes longer for a middle-income country to be ahigh-income one, during which period, the issues it is confronted are more complicated.It is relatively easy for a low-income country to join into the club of middle-incomecountries; but after that, a country may maintain its middle-income status for manyyears and can hardly turn itself into a high-income country. Known as “Middle-IncomeTrap”, this phenomenon is applicable to many middle-income countries, which hasdepressed their social and economic development, and slowed down their pace ofbeing high-income countries. Under this circumstance, it emerges as one of the mostimportant and most challenging tasks for the middle-income countries to avoid the“Middle-income Trap” and overcome the obstacles for sustained development.However, the traditional economics of development hasn’t paid enough attentionto this “Middle-Income Trap”, hence there’s no matured theoretic system applicable tothe research of this phenomenon. This thesis tries to make some contributions tocurrent research of this issue. After surveying academic literatures on the reasons ofthe “Middle-Income Trap”, this thesis chooses “Industrial Structure Upgrading” as themain objective of study, which is a vital way to avoid the “Middle-Income Trap”according to many other researchers. Unlike the traditional researches, this thesisfocuses on the affecting factors of industrial structure upgrading based on theperspectives of trade and finance under open economy framework. From these newperspectives, we can find more feasible and effective ways for the middle-incomecountries to promote industrial structure upgrading so as to avoid the “Middle-IncomeTrap” successfully. As we know, whether the industrial structure can upgrade or not, largely depends on the behavior of production firms, therefore, export of final goodsand import of intermediate goods can impact industrial structure directly. Meanwhile,the financial constraints faced by production firms will also impact a nation’s industrialstructure. Hence, this thesis chooses four typical and specific factors in the fields oftrade and finance to study their impact on industrial structure upgrading, including theeffects of two margins of firms’ export, import of intermediates, financial constraintrelaxation and capital account liberalization on industrial structure upgrading inmiddle-income countries.In the main body of this paper, first, we analyze the effects of two margins offirms’ export on industrial structure upgrading. Theoretically, this thesis develops aheterogeneous firm trade model to analyze the different effects of extensive andintensive margins of trade on industrial structure upgrading. Then we utilize theexporter dynamics database from World Bank to test the theoretical propositionsempirically. The results show that expansions along the intensive margin (exporter size)have positive effects on industrial structure upgrading; however, expansions along theextensive margin (number of exporters) do not have such effects. After analyzing thespecial characteristics of export firms in middle-income countries, it’s found that inorder to upgrade the industrial structure in middle-income countries, the existingexport firms in these countries should improve their performance and expand theirexport scale, on the other hand, it is necessary to increase the survival rates of theexport firms and lower the entry and exit rates to provide a sound environment for thepositive structural effects of the extensive margin.Second, the thesis analyzes the effects of import of intermediates on industrialstructure upgrading. With the development of production specialization andglobalization, the import of intermediate goods gains rapid growth in middle-incomecountries. As production firms’ import of intermediates can impact the productivityand the scale of tradable sectors and then impact other sectors, it thus could haveeffects on industrial structure upgrading. Theoretically this thesis develops amulti-sector growth model to show that the increase of intermediates import can havepositive effects on industrial structure upgrading through technology and pricechannels. Compared with the price channel, the technology channel tends to be a moreimportant channel to upgrade the industrial structure. The empirical results using panelFGLS estimation are consistent with theoretical propositions. It’s also showed that thepositive effects of intermediates import are more significant in upper middle-income countries. However, it should be noticed that the positive effects of intermediatesimport on industrial structural upgrading might decrease and even disappear after acountry become a high-income country. This is mainly because that makingtechnological progress through technology spillover is unsustainable for any country inthe long run. So focusing more on technology innovation is a proper way to getsustained improvement of industrial structure.Third, this thesis turns to analyze the financial constraint faced by productionfirms and to discuss the effects of relaxation of this financial constraint on industrialstructure upgrading. The analysis begins with discussing the channels through whichthe relaxation of financial constraint may have impacts on industrial structureupgrading. Then we use difference-in-difference model based on the data frommiddle-income countries to do the empirical study. It’s found that the relaxation offinancial constraint could have significantly positive effects on industrial structureupgrading in middle-income countries. To be specific, larger scale and higherefficiency of banking sector are helpful for the upgrading of industrial structure inmiddle-income countries. Meanwhile, the improvement of efficiency in directfinancing market also has positive effects on this upgrading. But the result for theexpansion of scale in direct financing market is non-significant. Furthermore, specificreforms in the financial sector, such as interest rate liberalization, reform of institutionsof direct financing market and strengthening the supervision in banking sector are allhelpful for financial constraint relaxation and hence can make contributions toindustrial structure upgrading. Besides, it should be noticed that among all thechannels through which financial constraint relaxation can have positive impacts onindustrial structure upgrading, the innovation channel is the key one.Fourth, with the development of financial globalization and closer connectionsamong countries, it requires middle-income countries to open financial sectorobjectively. Only by this, can financial sector provide adequate support to real sectorunder the new globalized circumstance. As the main part of financial openness, capitalaccount liberalization can impact the flow of international capital and the reallocationof international resources directly. This thesis uses the data of international capitalinflow to measure the degree of a nation’s capital account liberalization. Consideringthe possible composition effect, we study the effects of FDI, international portfolioinvestment and international debt flow on industrial structure upgrading separately. Aseffects of international capital inflow on industrial structure upgrading are relatively complicated, at first, we use panel threshold model to endogenously select countriesfor which the capital account liberalization have a positive effect on economic growth.And then we use difference-in-difference model to estimate the structural effects ofinternational capital inflow. It’s found that FDI inflow and portfolio investment inflowcould have significantly positive impacts on middle-income countries’ industrialstructure upgrading during non-crisis period, while the international debt inflow doesnot have.To sum up, the development of trade and finance can have effects on industrialstructure change under open economy. In order to avoid “Middle-Income Trap”, it isnecessary for middle-income countries to take part in the global value chainsspecialization positively, to increase intermediate import for upgrading industrialstructure, to promote the growth and sustainable development of the import and exportfirms, so as to enhance the adjustment and optimization of industrial structure. In thefinancial areas, promoting the development of financial market, relaxing firms’financial constraint, liberalizing the capital account orderly and rationally, andrealizing financial openness steadily are also good ways to upgrade middle-incomecountries’ industrial structure.The conclusions of this thesis provide important enlightenment for China whichhas just turned to be an upper middle-income country. In order to upgrade industrialstructure and avoid the “Middle-Income Trap”, it is necessary for China to furtherreform its trade and financial sectors. As for trade, on one hand we need to takemeasures to support national export firms’ expansion and increase the survival rate ofthese firms in world market; on the other hand, we need to promote the transformationand upgrading of processing trade. As for the financial sector, apart from carrying outmarket-oriented reform of interest rates continuously and promoting the constructionof multi-level capital market, it’s also necessary to open up the capital accountgradually and prudently. In other word, the logic sequence of liberalizing capitalaccount by relaxing FDI, portfolio investment and controlling external debt flow stepby step need to be followed.