How does the special financial zones (SFZs) affect economic transformation? : an empirical evidence from China

Abstract

 This dissertation tries to investigate the economic effect of China's special financial zones (SFZs) on economic structure, corporate innovation and corporate environmental, social, and governance (ESG). SFZs is an active exploration of financial system breakthrough in China. Since the first attempt in Wenzhou city, Zhejiang Province in 2012, through continuous exploration, 17 SFZs have been established in China by 2020. The SFZs scenario, the availability of provincial and company level data and the use of causal identification technologies such as Difference-in-Difference (DID) and Synthetic Control Method (SCM) make it possible for us to provide empirical evidence from China on the economic effects of financial liberalization. The first part examines the impact of the establishment of China's provincial SFZs (Guangdong Province, Yunnan Province, and Guangxi Autonomous Region) aimed at promoting economic structure transformation on the local economic structure (the ratio of the added value of the tertiary industry to the added value of the secondary industry). We document that SFZs inhibits the natural evolution of economic structure. Five years after the financial reform, the economic structure of the province the SFZs located decreased by 0.345 due to the liberalization financial policy, with a decrease range of 21.9%. The same result is obtained by using the alternative variables of economic structure (the added value of primary and secondary industries and their proportion in total GDP). The negative effect of SFZs on economic structure is realized by reducing the financial structure (the ratio of financial market to banking output value). The second part examines the impact of the establishment of China's provincial SFZs (Zhejiang Province, Jiangxi Province, Guangdong Province, Guizhou Province, and Xinjiang Autonomous Region) aimed at promoting green development on the ESG of local listed companies in high pollution industries. We document that after SFZs implemented the reform policy, the ESG level of enterprises in high-polluting industries increased significantly. The mechanism is that financial reform alleviates the financing constraints of enterprises to improve the corporate ESG. The policy experiment has attracted more institutional investors, thus improving the corporate ESG. The third part examines the impact of the establishment of China prefecture-level city SFZs (Wenzhou, Quanzhou, and Taizhou) aimed at promoting enterprise innovation and upgrading on the innovation of local listed companies. We document that the patent level of SFZs has decreased significantly after the implementation of the reform policy. The mechanism is that SFZs promoted shadow banking, thereby crowding-out the company's patent output. Social capital can reinforce the negative innovation effect of SFZs，which supports shadow banking as a mechanism. These findings supplement the literature on the economic effects of financial liberalization, financial structure, corporate innovation, and corporate ESG. It also has a strong practical guiding significance for SFZs. In short, for financial liberalization policy makers, even small reforms can be a huge victory, because the reform process often forms its own momentum. But it may also be a huge failure when ignoring the factors that seriously affect the effect of financial policy experiment.