Financial constraints and firm productivity in China: do liquidity and export behavior make a difference?

Financial factors have been found highly important in influencing firms’ real activities and in promoting aggregate growth. Yet, the linkage between finance and firm-level productivity has been overlooked. We fill this gap in the literature using a large panel of Chinese manufacturing firms over the period 2001-2007. We find that, especially for illiquid firms, productivity is strongly constrained by the availability of internal finance. Furthermore, we find higher sensitivities of productivity to cash flow for private exporters, but lower sensitivities for foreign exporters. Our results are robust to estimating a TFP model and a production function augmented with cash flow.