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Asia Pac J Manag DOI 10.1007/s10490-012-9303-y

Alternative financing and private firm performance
Daphne W. Yiu & Jun Su & Yuehua Xu

# Springer Science+Business Media, LLC 2012

Abstract Why do private firms grow vibrantly in transition economies despite their limited access to formal financing? This study underscores the importance of informal financing in facilitating the growth of private firms in China. Drawing from the institutional economics argument, we posit that informal financing, in the form of underground financing and trade credit, substitutes formal financing in providing financial assistance and capital to private firms in China. We further posit that the effects of two kinds of informal financing vary across provinces with different levels of institutional development, and complement each other by supporting firms in different industries. We test our arguments with a sample of 284 private firms in 19 cities in China. The results generally support the value-added effects of alternative financing and its coexistence with formal financing. Our study contributes to the literature by highlighting informal financing as a void-filling institution in the capital markets in China. Keywords Alternative financing . Capital access . Private firms . China

This work was supported by the National Natural Science Foundation of China (grant no. 71102118), the Research Base and Science & Technology Innovation Platform of Beijing Municipal Commission of Education (Accounting-Based Investor Protection), Funding Project for Innovation of Science, Technology and Post-Graduate Education in Institutions of Higher Learning under the Jurisdiction of Beijing Municipality (PXM2012_014213_000064) and China Center for Venture Capital Research of Beijing Technology and Business University. D. W. Yiu : Y. Xu Department of Management, The Chinese University of Hong Kong, Shatin, Hong Kong D. W. Yiu e-mail: dyiu@cuhk.edu.hk Y. Xu e-mail: yuehua@baf.msmail.cuhk.edu.hk J. Su (*) Business School, Beijing Technology and Business University, Beijing, China. e-mail: junsu@th.btbu.edu.cn

D.W. Yiu et al.

Entrepreneurship is regarded as an engine that sustains the economic development of a country (Baumol, 2002; Peng, 2001). In transition economies, entrepreneurial growth is largely contributed by the private sector. The growth of the private sector has been a significant aspect in the economic transition of transition economies such as China. During the 11th 5-year plan of the Chinese government, the number of private firms increased from 52,920 in 2005 to 102,354 in 2009, accounting for half of the total number of industrial firms in China. Also, the private sector contributed about 18.7% of China’s industrial value in 2009, which increased by 6.5% as compared to the amount in 2005 (National Bureau of Statistics of China, 2011). As such, private firms have been serving as the main driving force of China’s economic development and economic growth (Boisot & Meyer, 2008). Throughout the world, countries have adopted all sorts of policies and mechanisms to support the development of the private sector. For example, the United States facilitated the growth of the private sector by a series of tax incentives and a venture capital network that supports the founding and growth of start-ups (Audretsch, 2003). Compared with developed countries, the institutional environment of transition economies like China is characterized by the presence of institutional voids (Khanna & Palepu, 2000). Paradoxically, given such a large number of private firms, only RMB1,849 billion (i.e., 3.52% of total) loans extended by the state-owned commercial banks went to private firms in 2009 (People’s Bank of China, 2010). In the Survey System of China’s Enterprisers conducted by the State Council in 2009, 78.3% of private enterprise managers expressed that it is difficult to get loans from banks, and only 21.7% regarded it as not too difficult to secure loans...
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