THE ROLE OF FINANCIAL INSTITUTION MARKETIZATION IN CHINA'S INDUSTRIAL CONTESTABILITY

In this paper, we investigate how the marketization of financial institutions affects China's industrial contestability. Our empirical results show that a higher degree of marketization of financial institutions is significantly associated with both the operation of more firms and the smaller average size of firms. Moreover, the lower and upper quartiles of the conditional distribution of firm size are all significantly negatively associated with the higher marketization degree of financial institutions, whereas increased financial institution competition and market-oriented allocation of credit funds have greater negative effect on the average size of larger firms, relative to smaller firms. In sum, improvements on the degree of marketization of financial institutions lead to an increase in the number of firms and a reduction in the average size of firms in China's industry. Therefore, the marketization of financial institutions has a significant positive impact on China's industrial contestability.