Financial constraints and product market competition across business cycles: evidence from China’s manufacturing industry

Abstract

This paper examines the impact of financial constraints across business cycles on production market competition using firm-level data from China’s manufacturing industry during 1998–2012. This study constructs a theoretical model with respect to financial constraints and product market competition and conducts a hierarchically multivariate regression analysis to examine the effects of financial constraints in economic recessions and expansions. Financial constraints are generally found to hamper the firm’s competitive performance in its product market, especially in economic recession. Meanwhile, the mediating effect of product pricing is identified in this study as a channel through which a firm’s financial constraints negatively affect its competitive performance. The mediating effect is remarkably salient in economic recessions but not significant in economic expansions. A financially constrained firm is more likely to raise its product price in economic recession, which in turn curbs its competitive capacity in product market.