A Study On The Contract Enforcement Efficiency And Regional Industry Comparative Advantage In China

We discuss the micro foundation of industrial comparative advantage and regional export scale in China from the contract enforcement aspect. On the study of what determines the regional industrial comparative advantage in China, we explore three mechanisms, the specialized intermediate investment mechanism, debt finance mechanism and FDI location choice mechanism. On the study of what determine the regional export difference, we explore how the contract enforcement and property right protection raise the enterprise heterogeneousness in different regions and how it determines the region's export.On the study of the first mechanism on regional comparative advantage, we developed a simple incomplete enforced specialized intermediate contract model under monopoly competitive market at first. Theoretical analysis shows that ex post incomplete contract enforcement will distort the ex ante specific investment and product price. The more specialized intermediate input used in the production the more distortion happens. The region with higher contract enforcement efficiency will have comparative advantage on the industries intensively using the specialized intermediate inputs. This point is significantly supported by empirical study with Chinese regional and industrial data. This study gives some policy implications for Chinese judicial reform on efficiency improvement and the adjustment of regional industrial structure.On the study of the second mechanism on regional comparative advantage, we developed a debt contract enforcement model under monopoly competitive market structure at first. Then we discuss how the debt contract enforcement efficiency will affect regional comparative advantage. The debt contract model analysis shows how the contract enforcement efficiency will affect regional comparative advantage by "financial enlargement" and "producing scale enlargement" effects. More efficient higher contract enforcement will decrease the interest rate and it gives enterprise the incentive to enlarge the debt size and produce with larger scale. Finally, the final goods will be sold at a lower price and thus the comparative advantage gained. The relative empirical analysis with Chinese industrial data from regions supports this theoretical mechanism of the origin of regional comparative advantage. The regions with more efficient contract enforcement will have the comparative advantage in the industry with higher capital elasticity. It gives the policy connotations on regional contract enforcement efficiency and regional comparative advantage.On the study of the third mechanism on regional comparative advantage, we developed the formal incompletely enforced contract model in chapter 3, discussed how the regional contract enforcement difference will affect foreign investor's profit and its location choice and finally affect the regional comparative advantage. The theoretical model shows that when the contract can not be fully enforced, those highly contract-intensive foreign investments will choose the regions with high contract enforcement efficiency. The empirical study with 19 manufacturing industrial and regional data supports this idea. By controlling the effect from regional agglomeration and human capital, it shows that the contract-intensive FDI industry is likely to locate in region with higher contract enforcement efficiency. Since the FDI has a high export preference, this regional FDI structure difference will be an important origin of regional comparative advantage.On the study of regional export size, a monopoly competition model with two countries and three regions is developed following the New Economics of Geography framework in this paper. The micro-mechanism of Chinese regional unbalanced exports is studied, and the attribution of institution quality difference to this unbalance is emphasized. By taking advantage of Chinese regional export data during 1998 to 2004, we found that local legal institution quality and the property right protection institution play a significant role in the regional unequal export by controlling the regional difference of technological level, labor, geography, financial development and FDI. The reduction of regional institutional difference becomes more and more important for the alleviation of the unbalanced development of regional export and economy.The policy connotation is clear that the improvement of contract enforcement is meaningful to change the region's comparative advantage. Firstly, it will relief the distortion in specialized intermediate input and it will change the FDI location choice and then the comparative advantage. Secondly, it will help enterprise to debt more, the industry with higher capital elasticity will have dynamic comparative advantage. Thirdly, it will not only enable regions to attract more FDI, but improve the FDI structure and it's technology diffusion probability. This conclusion also adapts to inter-regional investment. Finally, with the upgrading of export structure, the export becomes more and more sensitive to contract enforcement and property right. Improving the qualities of institutions will promote a harmonious development between regions.