Does financial liberalization matter for domestic value added in exports? Evidence from China

Abstract

ABSTRACTUpstream stages of production chains are often capital intensive, so financial liberalization which improves the availability of financial resources may expand the supply of domestic inputs and then raise domestic value added in exports of downstream firms. After China’s accession to the WTO, China’s government removed the restrictions on foreign banks’ business and allowed foreign banks in China to offer Chinese currency (RMB) services to Chinese firms. We utilize this policy change to test the effects of financial liberalization on Chinese firms’ domestic value added in exports. We have three main findings: (1) domestic value added in Chinese firms’ exports is positively associated with the removal, (2) the removal of foreign bank business restrictions leads to a general change of local financial markets, which facilitates firms’ financing activities and (3) the improvement in domestic value added following the removal is not mainly driven by export mode switching from processing trade to ordinary trade but by the increase in domestic inputs.KEYWORDS: Financial liberalizationdomestic value addedintermediate inputsJEL CLASSIFICATION: G21G28F14 Disclosure statementNo potential conflict of interest was reported by the author(s).Notes1 Regulations of the People’s Republic of China on the Administration of Foreign-funded Financial Banks.2 We thank anonymous referees for this suggestion.3 A Herfindahl-Hirschman Index based on bank loans measures the competition among banks more precisely. However, the data on bank loans are not available to us. So we have to use this alternative measure.Additional informationFundingThis work was supported by the National Natural Science Foundation of China [71703066].