WTO accession, foreign bank entry, and the productivity of Chinese manufacturing firms

After China's accession to the World Trade Organization (WTO) in December 2001, foreign banks are allowed to enter the Chinese banking market in phases. Using firm-level data from the National Bureau of Statistics of China which cover all state-owned and non state-owned manufacturing firms with sales over 5 million RMB, we examine the relationship between foreign bank entry and the industry-level productivity growth of China's manufacturing sector. Our empirical results suggest that (a) on average, opening up a region for foreign bank entry has no impact on aggregate productivity growth, (b) however, industries more dependent on external finance grow faster after a region is opened up for foreign bank entry, and (c) these results are due to changes in technical efficiency rather than reallocation. Overall, this paper provides new evidence on the relationship between banking market structure and manufacturing productivity in a fast growing developing country. Journal of Comparative Economics 44 (2) (2016) 326-342. Department of Economics, Copenhagen Business School, Denmark; School of Banking and Finance, University of International Business and Economics, Huixin East 10, Beijing 100029 China; Wang Yanan Institute for Studies in Economics and Department of International Economics and Business, Xiamen University, China. (C) 2015 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.