Agglomeration and Firm Financing: Evidence from High and New Technology Chinese Firms in the Pearl River Delta

Abstract Using firm-level panel data from 1998 to 2015 for high and new technology firms in the Pearl River Delta in China, I investigated the effect of policy-directed industrial agglomeration on firm financing (trade credit and bank loan). I find that small and young firms are more likely to utilize trade credit, while large and old-established firms tend to rely on bank loans. I also find that the agglomeration effect is more remarkable for foreign and private-owned firms both in trade credit and bank loans, while state-owned firms fail to benefit from the effect of industrial agglomeration. These findings suggest that in China, policy-oriented industrial agglomeration plays an important role in alleviating financial constraints. Additionally, endogeneity issue is addressed by using two-stage estimation with instrumental variable and system generalized method of moments (GMM) estimation.