A Study On The Impact And Mechanisms Of Financial Development On Total Factor Productivity In China

In the harsh domestic and international economic situation, accelerate the growth of total factor productivity (TFP) is the key to achieve sustainable development in china. In one country, Total factor productivity can’t achieve growth without financial support. Especially, along with the deepening of financial system reform in China, the important position of financial system in the modern economic system has become increasingly prominent, and financial system has played a more and more important role in the evolution route of total factor productivity. Thus, under the double background of economic growth mode transformation and financial system reform deepens, it has important theoretical and practical significance to study systematically the impact and its mechanisms of financial development on TFP.In this paper, the impact effect and its mechanism of financial development on TFP are explored from the aspect of theoretic analysis firstly. Then, the current status quo of China’s regional financial development are described and analyzed statistically using the indicators of financial interrelation ratio and private credit ratio and others; China regional TFP are measured based on stochastic frontier function (SFA) extension methods, and the relationship between financial development and TFP is described statistically. Finally, the productivity effect of financial developpment and its mechanisms are studied by using empirical researches based on the China’s provincial panel data. In the theoretical study, following the main idea of the financial functional view, the financial development variable is included the Schumpeterian growth model, and the impact effect and its mechanisms of financial development on TFP are explored in this model by mathematical induction. The model suggests that financial development eases the financing constraints problem of the technological upgrading projects, and enhances the endogenous success probability of these projects, at the same time, promotes capital flow to the industries which have better development prospects. In one word, financial development promotes the total factor productivity by inspiring technical progress and optimizing the capital allocation. Based on the China’s provincial-level panel data, the derivation results of the theoretical model are tested by empirical research, and the following conclusions are achieved:Firstly, the financial efficiency development significantly contributed to the growth of total factor productivity in China, but the financial scale development’s effect is not obvious. Other variables that affect the total factor productivity growth, such as infrastructure, human capital, urbanization will significantly promote the growth of total factor productivity, but international trade and FDI have negative impact on TFP, but not significantly.Secondly, financial development speeds up the growth rate of total factor productivity, but this promotion effect present significant decreasing trend. When the level of financial development exceeds a certain critical value, this promotion effect will get to zero. In the perfect credit environment, total factor productivity growth rate will be equal to the exogenous rate of technological progress, can’t be impacted by the financial development level.Thirdly, promoting technological progress is one of the channels which financial development promotes one country’s total factor productivity. The impact of financial development on international spillover exist significant threshold effect. When the level of financial development below the certain threshold, the impacts of FDI and international trade on the domestic total factor productivity are significant negative; when the level of financial development exceeds the certain threshold, the FDI on domestic total factor productivity is significantly positive, the impact of international trade is not significant. In addition, financial development promotes significantly regional innovation capability. In other variables that affect the innovation capacity-building, the contribution of R&D staff is significantly positive. R&D expenditure’s coefficient is positive but not significant; international trade significantly promote regional innovation output growth, FDI significantly inhibits the regional innovation capability; the variables such as human capital, specialization have no significant effect.Fourthly, optimizing the capital allocation is the other channel which financial development promotes one country’s total factor productivity. The efficiency of China’s regional capital allocation is measured by the industry investment reaction coefficient method,which is developed by Wurgler (2000), The measure results show that the efficiency of capital allocation is very low in our real economy. The empirical results show that the financial development will significantly contribute to the enhancement of the efficiency of capital allocation. In addition, the share of state-owned enterprises and FDI will have negative significantly impact on the efficiency of capital allocation, the impact of government intervention is not significant, the effect of infrastructure, human capital and international trade are significantly positive.Fifthly, the financial development is divided into two dimensions:financial scale development and financial efficiency development. The estimated results in empirical researches show that the effects of financial efficiency development are obvious than the effect of the financial scale development, wherever in the path of the evolution of total factor productivity growth rate, or in the process of promoting technology spillover effects, ability construction of innovation and capital allocation effect.