The Impact Of Factor Market Distortions On The Development Of Processing Trade Of China

Since the reform and opening up, China’s foreign trade, especially processing tradehas gained rapid development. At the same time, another obvious phenomenon is thatfactor market has not kept pace with the product market in the market-oriented reform.Factors like local market segmentation lead to serious distortions of the factor market.In fact, as a low-end link in the global value chain, processing trade has a close linkwith factor market distortions.This dissertation discusses the impact of factor market distortions on the developmentof China’s processing trade, since there is a close link between them. Empirical testresults show that the distortions in factor market not only stimulate the motivation ofthe enterprises engaged in processing trade, but also inhibit the enhancement of thevalue-added rate of processing trade. Such a relationship between factor marketdistortions and processing trade leads to the formation of a low-end "lock in" effectand "pauperization growth" situation. Specifically, Financial market distortions playsa positive incentive effect on the scale of the development of processing trade, whilethe impact of labor market distortions is inverted U-shaped. At the same time,financial market distortions inhibit the transformation and upgrading of processingtrade, while the impact of labor market distortions shows a U-shaped feature. Inaddition, the results of grouping and cluster analysis show that the impacts of factormarket distortions on the development of processing trade are not exactly the samebetween different regions due to the differences of regional economic development.Processing trade enterprises are facing tremendous pressure to survive in the financialcrises. They are urgent to enhance their competitive strength through thetransformation and upgrading. To this end, the government should take activemeasures to promote market-oriented reform process of the factor market. By creatinga more robust intellectual property protection environment, a more equitable financingof credit market and other solutions, the government can make a better factor marketfor the transformation and upgrading of processing trade enterprises.