Download A Research on Financial Support for Regional Economic Development

A Research on Financial Support for Regional Economic
Development
XU Guihong, XIAO Liang
School of Economy, Shenyang University of Technology, P.R.China, 110178
[email protected]
Abstract: In order to analyze the function of finance in regional economic development, theoretical
analysis and empirical analysis are used. The theoretical analysis proofs that finance plays an important
role in regional economic development. Unit root test and Granger causality test are used in the
empirical analysis. The test results indicate that financial support can promote economic growth. The
suggestions of strengthening financial support for regional economic development include: establish a
good financial ecological environment; perfect local financial laws and regulations; strengthen
policy-oriented financial support to improve the industrial optimization, etc.
Keywords: Financial Support, Regional economic development, Theoretical analysis, Empirical
analysis, Granger causality test
1 Introduction
Finance is the core of modern economy, and has been infiltrated into all aspects of economic life.
In the process of exploring source of economic growth, the financial factor has aroused more and more
attention. The traditional economic theory thought that the level of financial development is the result of
economic growth, its function is to make its own continuous development to meet the needs of the
economical sectors. But the modern view is that the financial development plays a positive role in
promoting economic development. Most of studies support the conclusions of that financial
development promotes economic growth, but there are many arguments about how financial
development impact on economic growth. Structure theory which takes Goldsmith as representative
thinks the quantity and structure of financial variables influence economic growth, therefore financial
development indicators and the structure of financial assets has become an important factor on economic
growth. The research results of R. G. King & R. Levine (1993) are the results of has provided
experience to support this view and confirmed from the negative side that the development level of
financial serious impediment to economic growth. Rajan & Zingales (1996), Kunt & Maksimovic (1996)
all use a lot of industry data for analysis, the results show that the level of development and financial
structure have a substantial impact the rate of economic growth. On the other hand, theory of financial
suppresses which takes Ronald McKinnon and Edward. S. Shaw as the representative thinks that, for
developing countries, financial liberalization of real interest rates and the real exchange rate is the
important way of promoting economic growth. Greenwood & Jovanovich (1990) noted that the high
fixed costs of setting up financial intermediation system lead to the “threshold effect” among financial
development and economic growth. The “Threshold effect” explains the differences in financial levels
between developed and developing countries.
As continuous deepening of the economic and financial reforms of China, it has more and more
important theoretical and practical significance to explore the relationship between economic growth
and financial development. From early 1990s, Chinese researchers began to study the relationship
between financial development and economic growth in china, such as Tan Ruyong (2000), Han
Yanchun (2002) and etc. However, these studies basically discuss China's economic development as a
whole. After 2000, there have been a lot of researches on the relationship between financial
development and economic growth in the three major regions (eastern, central and western areas), such
as Zhou Li (2004), Men Hongliang, Li Shu (2004) and etc. Because of China's inter-provincial
difference is quite large, so some researches further to specific province, such as Liu Renwu (2003) and
etc.
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In general, these studies are based on one part of the national perspective, while the other part,
though based on the regional level, but those research were extended in the past, and simple verified the
obvious conclusion that financial development promotes economic growth, and less discuss the causal
relationship between financial development and economic growth in deep level and how financial
development support regional economic growth. Therefore, it is necessary to discuss these issues deeply.
2 The theoretical analysis
2.1 Finance supports regional economic development by providing risk management
Regional economic development requires a large amount of investment, which is accompanied by
risks. Due to the existence of the costs of information and transaction, financial markets and institutions
are needed to facilitate the gathering, transacting and avoiding of risk. Constrained by liquidity and yield
risk, investors often prefer the short-term projects, resulting in insufficient investment in long-term
projects which is low liquidity and high return. The risk management function of financial system
facilitates the rapid realization of investment projects for investors, which is advantageous in the
formation of long-term capital and allocation of resources. By facilitating transactions, the financial
markets reduce the liquidity risk. When the transaction costs decline, more investment will flow to
low-liquidity and high-return projects. Similarly, financial intermediaries can also increase the liquidity
and reduce the liquidity risk. In the process of regional economic development, a number of high-return
projects require long-term capital, but savers are not willing to give up their control over the savings.
Thus, if the financial institutions are not willing to provide the fluidity to the long-term investment,
some high-return projects will lack the investment to carry on with difficulty. Similarly, many
application of new innovation must be pour into massive long-term capital of region inside and outside.
The financial system may resolve the problem of capital input through providing the risk management.
2.2 Finance supports regional economic development by providing information
As it normally takes higher costs to get information, investment can not flow to the
maximum-value project. On the one hand, individual investors generally do not have the time, effort and
approach to collect and process the information on such large scope of company, manager and market;
On the other hand, investors are reluctant to invest in the project on less reliable information. The
finance intermediary has superiority of information acquisition, it may realize the capital effective
disposition and promotes the regional economies development through supplying the information for
investor and providing the fund to high- return projects directly. The cost of information acquisition has
driven the appearance of financial intermediary. Assume that a production technology information
acquisition cost is fixed, if there is no intermediary organization, each investor should pay the fixed
costs, the ultimate reaction to the cost structure of this information is that groups of individual investors
will establish or participate in financial intermediaries, to reduce the cost of acquiring and processing
investment information. The finance intermediary can complete these processes on behalf of all
members. Thus, the cost of access to information has been reduced; a variety of investment
opportunities have been facilitated in information collection; allocation of resources has been improved.
Then regional economic growth can be promoted accordingly
2.3 Finance supports regional economic development by supervising the operator and solving the
incentive problem
When one side of the transaction has the information which the other side has not, or one side is
making decision as the agent of the other side, the financial system provides the solution of incentive
problem. For example, the loan mortgage may make the lender to obtain the specific when Loans in
arrears, lender only need to pay attention to whether the market value of collateral assets is sufficient to
pay the matured loan principal and interest, thus reduce the incentive and loan-related issues. Financial
contracts, markets and intermediaries, not only can reduce the cost of supervising on managers after the
fund is infused, also can solve trustee - agent problem. For example, the company owners will establish
the financial arrangement, and impel the manager to manage the company according to the
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shareholder-benefit-maximization principle; “Exterior” creditors, such as banks, stock and bond holders
do not conduct day-to-day management, but establish the financial arrangement to impel the manager to
operate the enterprises according to the benefit of “exterior” creditors. The lack of financial
arrangements promoting corporate governance may hinder the scattered savings from concentrating and
flowing to the profitable investment in region.
2.4 Finance supports regional economic development by mobilizing savings
In the modern economy, personal funds are often unable to meet the requirements of the minimum
investment. Financial instruments provide the opportunity that the residents have the decentralized
securities so that they can invest in these enterprises achieving the efficiency scale, and the liquidity of
assets can be improved. By improving the dispersion and the liquidity of risk and enlarging the
appropriate scale of enterprises, the savings mobilization can promote the allocation of resources. In
addition the direct effect of mobilizing savings and raising capital, better savings mobilization can
promote technological innovation. In this way, through the effective mobilization of savings for the
project, the financial system play a very crucial role in promoting technological innovation, applications
and stimulating regional economic growth.
2.5 Finance reduces transaction cost and promotes specialized division of labor by facilitating the
exchange
One of the main functions of the financial system is to provide the payment clearing and settlement
services for transactions of goods, services and assets. Transaction with currency will reduce the
transaction cost rather than goods for goods, thus can promote technological innovation. Because there
is cost in each transaction, therefore, the transaction cost reduction of financial system can promote
greater specialization. More specializations request more transactions. In this way, the financial
development impetus transaction and stimulates the enhancement of productivity. Through providing
this kind of convenience to transaction, the financial system reduces the transaction cost, and benefits
more detailed division of labor, and then promote technological progress and regional economic
development.
3 An empirical analysis
We select Liaoning province as a sample to study the financial impact on the development of
regional economy. Financial interrelative ratio (FIR) is selected as the financial development indicator,
with the sum of deposits and loans of financial institutions of Liaoning province as the approximate
indicator of financial assets. FIR is defined as the ratio of all deposits and loans of financial institutions
to GDP in this article. Economic growth indicators include three: per capita real GDP (PGDP), three
industrial output values (PI is primary industrial output value; SI is secondary industrial output value; TI
is tertiary industrial output value), Per capita annual net income of farmer (PIF).
We choose 1991-2006 correlation data of Liaoning province, and use the time series analysis, to
examine the causal link between financial development and economic growth with Granger causality
test. Granger causality test has an implicit assumption that these data are stable. Therefore, the stable
examination to the variables must be carried on first. In order to reduce the fluctuation of the variables,
we take the logarithm to the variables and use ADF test. The test results are in table 1.
Variables
LNFIR
LNPGDP
LNPI
LNSI
LNTI
LNPIF
Table 1 Augmented-Dickey-Fuller Unit Root Tests
Test statistic Test type
10% critical value 5% critical value
-3.881
(c,t,1)
-3.3393
-3.7921
-3.372
(c,t,0)
-3.3228
-3.7611
-3.055
(c,t,1)
-3.3393
-3.7921
-3.967
(c,t,1)
-3.3393
-3.7921
-4.155
(c,t,0)
-3.3228
-3.7611
-3.461
(c,t,2)
-3.3588
-3.8288
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Stability
Yes
Yes
No
Yes
Yes
Yes
The result shows that besides PI, all variables have rejected original unit root hypothesis at 10% or
5% significance levels, which indicates that these variables are stable,
Then we examine the causal relation to the stale variables. The test results are in table 2
Variables
LNFIR
LNPGDP
LNFIR
LNSI
LNFIR
LNTI
LNFIR
LNPIF
Table 2 Granger Causality Tests
Null Hypothesis
Lags
LNFIR does not Granger cause LNPGDP
2
LNPGDP does not Granger cause LNFIR
2
LNFIR does not Granger cause LNSI
2
LNSI does not Granger cause LNFIR
2
LNFIR does not Granger cause LNTI
2
LNTI does not Granger cause LNFIR
2
LNFIR does not Granger cause LNPIF
2
LNPIF does not Granger cause LNFIR
2
F-statistic
6.18744
16.6348
2.02932
15.4052
2.93784
14.6564
8.09916
0.41106
Probability
0.02040
0.00095
0.18731
0.00124
0.10422
0.00148
0.00973
0.67479
This test results show that at 5% significant level, LNFIR and LNPGDP have Granger causal
relationship mutually; at 1% significance level, LNFIR is the Granger causality of LNPIF, and LNSI is
the Granger causality of LNFIR, and LNTI is the Granger causality of LNFIR.
The results indicate that financial development can promote economic growth, and in turn the
economic growth can also urge the financial development; financial development can contribute to the
per capita net income of farmers; the development of secondary and tertiary industries enlarges the
financial demand, and thereby urges the financial development, which conforms to the financial
demand-decision theory.
4 The Suggestions
4.1 Establish a good financial ecological environment
First, the financial industry should be given priority as a leading industry. Through the
development of the financial system, we should strive to improve the financing environment of the
non-state economy, and raise the proportion of enterprises’ direct financing, and improve the efficiency
of the financial system. Second, the regional financial center should be formed, and its cascade effect
should be displayed fully. Third, we should vigorously develop the local financial institutions, and take
effective measures to develop the existing local financial institutions to avoid the loss of the hard-earned
financial resources. We should establish the industrial organization systems mainly composed of mall
and medium-sized financial institutions, and foster a number of financing small and medium-sized
banks as soon as possible, and provide financial services to small and medium enterprises and private
economy which have a comparative advantage in labor-intensive.
4.2 Perfect local financial laws and regulations
In terms of legislation, based on the actual local situation, we may formulate local laws and
regulations such as credit management, real estate mortgage registration, financial claim protection, and
the local state-owned financial asset management and so on, to effectively protect the legitimate rights
and interests of financial property owners and regulate the financial behaviors of concerned litigants.
In terms of justice, we should actively promote the simple legal procedure to reduce the litigation
cost of financial claims cases and improve the lawsuit efficiency, and improve executive procedures to
improve the implementation of the recovery of financial claims, and prevent the interference of local
protectionism to ensure a fair settlement of financial claims.
In terms of policy, we should introduce special policies to solve the problems left over by history,
and enhance policy-oriented financial support to the backward areas, and guarantee that the fund sources
of policy-oriented bank of is sufficient, and support regional infrastructure construction. According to
the overall regional economic development planning, with the specific goal of regional economic
development, we should establish regional policy-oriented financial institutions specially serving the
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specific development goal to make up for the deficiencies of national policy-oriented financial system,
and develop regional commercial financial institutions with difference.
4.3 Strengthen policy-oriented financial support to improve the industrial optimization
We should actively promote policy support for the high-tech industry, and accelerate the use of
information technology to transform the traditional industries, and accelerate the optimization and
upgrading of industrial structure, and strengthen independent innovation capability, and vigorously
develop secondary and tertiary industries, and improve industrial optimization degrees. In the process of
regional economic development, while making full use of market mechanism, we should make up for
the limitations of the market mechanism through the input of national policy and capital. The effective
measure to realize this goal is to full play the role of policy-type finance, and improve its function of
investment and credit, to provide the powerful financial support for the regional economies
development.
4.4 Enhance the financial support for rural economic development
The results of empirical analysis showed that financial support can contribute to the increasing of
the per capita net income of farmers, thus promoting regional economic development. Therefore, we
should enhance the financial support for rural economic development, and promote rural financial
reform, to provide a strong financial support for regional economic development through various
channels. First, we must deepen the reform of rural credit cooperatives, and actively explore diversified
pattern of reform, to make the rural credit cooperatives to maintain the vigor and vitality, and give full
play to its role as the main supporting force of agriculture. Second, we must accelerate the reform of
postal savings to guide the funds of postal savings flow back to rural areas through the subscription of
financial bonds of Agricultural Development Bank, the subordinated notes of Agricultural Bank, and the
agreement for deposits with rural credit cooperatives and so on. Third, the folk credit should be
regulated. Relevant laws and regulations should be enacted to build a public and legitimate platform and
ease the contradiction between supply and demand of funds in rural areas.
5 Conclusion
The theoretical analysis proofs that finance can support regional economic development by
providing risk management and information, supervising the operator and solving the incentive problem,
mobilizing savings, and reducing transaction cost. The empirical analysis provides the experiential
conclusion that financial development can promote economic growth. According to the results of
theoretical analysis and empirical analysis, we should strengthen financial support for regional
economic development through establishing a good financial ecological environment, perfecting local
financial laws and regulations, strengthening policy-oriented financial support to improve the industrial
optimization, and enhancing the financial support for rural economic development.
References
[1] Engle R F, Granger C W J. Cointegration and Error Correction: Representation, Estimation and
Testing. Econometrica, 1987, 55: 251 -276.
[2] Edward. S. Shaw. Financial Deepening in Economic Development. New York: Oxford
University Press, 1973: 24-26
[3] Granger C. W. J. Some recent development in a concept of causality. Journal of Econometrics, 1988,
39: 199.
[4] Levine R. Financial Development and Economic Growth: Views and Agenda, Journal of Economic
Literature, 1997, 35: 688-726.
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