Remote markets as shelters for local distortions: Evidence from China

- We study the effect of SOEs on sales distribution of private firms in China.
- Such effect is not unconditional on financial constraints of private firms.
- SOE presence reduces (increases) private firms' export inclination with (less) financial constraints.
- A model of financial constraints, market access and political distortion is built for explanation.
- Internet sales can alleviate financial constraints and have an effect on SOEs-sales distribution relationship.

We study how the presence of state-owned enterprises (SOEs) distorts private firms' decision on interprovincial sales in China. Using data from World Bank Investment Climate Survey and Annual Survey of Manufacturing Firms in China, we find evidence that the prevalence of SOEs in a city-industry where private firms reside will affect these firms' decision on the allocation of sales between interprovincial markets versus adjacent market. The direction of the effect on private firms, however, depends crucially on the private firms' access to credit. Specifically, the prevalence of SOEs leads to a higher propensity to sell to remote markets for firms with adequate financial access, whereas the opposite is true for firms who are credit constrained. We build a parsimonious model which links political/market distortion, market access, and credit constraint to explain these patterns, and argue that remote markets can serve as shelters for local distortions resulted from SOEs presence for some private firms.