Research On Financial Development And Export Sophistication

Export sophistication, an integrated concept of exports’technology content and productivity, extends a new horizon to research on international trade. Up to now, attention on the research between finance and trade has been drawn to trade volume and structure, and export sophistication has been overlooked. In fact, the lagged financial system has limited China’s elevation in export sophistication. Research on the relationship between financial development and export sophistication will be meaningful to foreign trade transformation and financial system reform.As export sophistication upgrading is a natural ending of one nation’s capacity and productivity in manufacturing complexities, reseach on the relationship between financial development and export sophistication should be based on the analysis of characteristics of the complexities in the view of the intra-product division. It found that more complicated goods have more varieties and stronger heterogeneity in its intermediates’and are of high complexity in transaction and technology. Fragmented value chains make the R&D and production capability in heterogeneous goods the keys to get more benefit from foreign trade, and among it, R&D is the most important. Enterprises, as the major players in the activities of R&D, are often finance-constrained and have to make choices between investment in R&D and production, thus local financial development will work on export sophistication by route of enterprises’tendency in choosing investment in R&D. Furthermore, under the assumption of constant technology, intra-product division in complexities makes transaction costs among heterogeneous intermediates the other important view to this research. More complicated goods have more frequent and difficult transactions between its intermediates, and effective financial system has advantages in conquering transaction costs in consequence of the asset specificity of heterogeneous intermediates, alleviating the underinvestment in producing heterogeneous intermediates and forming the comparative advantage in complexities through the mechanism of relative price between the complicated goods and the simple ones. In all, we constructed the dual mechanisms of financial development working on export sophistication, mathematically modeled them and provided six theoretical hypotheses which we empirically tested in the following parts of this paper. With the empirically test model of H-O factor-intensive comparative advantage, it found that financial development is an important factor to enhance the exports’sophistication. Regions with high-level financial development have comparative advantage in complexities intensive of heterogeneous intermediates, that is robust to different proxy variables for financial development or comparative advantage.Based on the specially constructed indicators of investment in heterogeneous intermediates, we test the effect of financial development working on the exports’sophistication by the path of transaction-cost saving with the dynamic panel GMM Model, which is verified via alleviating underinvestment in producing heterogenous intermediates on account of asset specificity and robust to overall and sub variables indicating financial development. One important finding was that the sum effect of the three sub variables (financial scale, financial efficiency and financial activity) is less than effect of the overall variable of financial development, which suggests organic and systematic financial system and the existence of "system premium".Based on the construction of two special indicators, exports’sophistication with deduction of processing trade and financial development proxied by financial marketizing index reflecting the characteristics of Economies in transition, we empirically test the effect of financial development working on exports’sophistication through the path of promoting enterprises to invest in R&D by using China’s industrial enterprises’data. The study shows that the tendency to invest in R&D depends heavily on the cash flow of Chinese enterprises’and compared to state-owned enterprises, private firms faced more financial outsourcing constraints, that supports the banks’credit discrimination on enterprises of different ownership in China. The further empirical test shows that except the western area, in the whole China or the middle or east area, the effect of financial development working on exports’sophistication via the increasing of tendency for enterprises to choose investment in R&D is significant and this positive effect works on both of state-owned and private enterprises in these areas, but for the latter it is more significant. The level of financial development in the western area still don’t cross the threshold to motivate private firms to invest in innovation, but financial marketization have forced the state-owned enterprises to compete and innovate, and finally promoted the exports’sophistication of this area. Based on the theoretical and empirical conclusions, we provide three suggestions to elevate China’s exports’sophistication. Firstly, the financial market needs to enter freely, interests should be marketized and financial effeciency should be enhanced; Secondly, financial structure should be optimized and harmonious financial system must be attained; The third is to implement regionalized strategy to develop financial market. This research will benefit China to apply the working mechanisms between financial development and exports’sophistication to endogenously promote economic structure upgrading and sustainable development by deepening China’s financial system reform.