Credit constraints and firm productivity: Microeconomic evidence from China

We use a panel of over 600,000 Chinese firms (1998-2009) to investigate the effects of credit constraints on firm productivity. We find that both internal finance through a firms own cash flow and external credit supply significantly promote firm productivity and productivity growth rates. Specially, there is a substitution effect between internal finance and external credit supply: the marginal effect of internal finance on firm productivity is weaker when firms have sufficient external credit. Also, internal finance is more important for firms in those financially vulnerable industries. Finally, we observe that marginal effect of both external credit supply and internal finance on firm's productivity is weaker for SOEs than non-SOEs.