Production-finance integration and resource allocation efficiency of China’s manufacturing firms

This paper extends the CES production function to construct and measure capital and output distortion indices for Chinese manufacturing firms, and examines the conditional associations between production-finance integration and resource allocation outcomes. Using propensity score matching and two-stage least squares estimation with instrumental variables, we find that, relative to non-integrated firms, production-finance integrated firms exhibit significantly higher capital efficiency and lower resource distortion, but show no significant difference in labor efficiency. Among various integration models, the “entity + securities” model exhibits the most pronounced patterns. The overall technological progress of sample firms is biased toward capital, and this trend is associated with lower capital efficiency and higher resource distortion. These findings are consistent with the view that policies promoting production-finance integration may benefit from focusing on the alignment between integration models and the direction of technological progress, and that policymakers may also consider steering technological advancement toward a more labor-augmenting direction to mitigate the potential adverse effects of capital-biased technological progress.