Click here for search results

Site Tools

Institutions, Ownership, and Finance: The Determinants of Profit Reimbursement Among Chinese Firms

Title: Institutions, Ownership, and Finance: The Determinants of Profit Reimbursement Among Chinese Firms
Pub. Date: July, 2005
Topic: Investment Climate
Full Text: Adobe Acrobat

Johnson, McMillan, and Woodruff (2002) examine the relative importance of property rights and external finance in several Eastern European countries.  They find property rights to be overwhelmingly important, while external finance explains little of firm reinvestment.  McMillan and Woodruff (2002) further conjecture that as transition moves along, market-supporting (financial) institutions should become more important.  This paper reexamines those issues in the context of China in 2002, when the transition had moved far.  We also find that secure property rights are a significant predictor of firm reinvestment. However, in line with McMillan and Woodruff, we find that access to external finance in the form of bank loans is also associated with more reinvestment.  Following Acemoglu and Johnson (2003), we separate our proxies for the security of property rights into two groups: those measuring the risk of expropriation by the government and those measuring the ease and reliability of contract enforcement.  Whereas those authors’ cross-country results suggest that risk of expropriation is the more severe impediment to economic development, ours indicate that both expropriation risk and contract enforcement play a role in Chinese firms’ reinvestment decisions.  We also find that another aspect of property rights, the extent of private ownership, is associated with greater reinvestment.  At China’s current stage of development, expropriation risk, contract enforcement, access to finance, and ownership structure all appear to matter for reinvestment decisions.  Some evidence also exists that access to finance and government expropriation affect small firms more than large ones.

Permanent URL for this page:

© 2016 The World Bank Group, All Rights Reserved. Legal