Does Renminbi Internationalization Foster Exporting Firm Innovation？ Evidence from the Pilot Program of Cross-border Trade Settlement in Renminbi
YUAN Kaibin, LI Wanli, ZHANG Weijun
School of Finance, Southwestern University of Finance and Economics; College of Finance and Statistics, Hunan University; School of Finance, Lanzhou University of Finance and Economics
Summary:
The orderly promotion of the internationalization of the renminbi is emphasized in the 20th National Congress of the Communist Party of China. The renminbi internationalization strategy first emerged when the People's Bank of China, the Ministry of Commerce, and other ministries jointly issued the “Administrative Measures for Pilot Cross-border Trade Settlement in Renminbi” in July 2009. According to these measures, pilot firms are no longer restricted to invoicing their current accounts in foreign currencies, thus offering a zero-break in the internationalization of the renminbi. The role of the renminbi in international settlements is steadily developing, and it has gradually become the world's fifth-largest settlement currency. The pilot program has provided the basic conditions for Chinese exporting firms to avoid foreign exchange exposure in international trade, allowing them to transition from the goal of earning foreign exchange to earning the domestic currency. Theoretically, whether exporting firms use their domestic currency for trade invoicing does not only depend on external policy permissions, as firm-level bargaining power is required to actively choose the settlement currency in cross-border trade. Only when these two prerequisite conditions are simultaneously met can exporting firms achieve domestic currency settlement in cross-border transactions. The rigid requirements for domestic firms to settle in the domestic currency under the current account have been gradually eliminated since the pilot program for cross-border renminbi settlement was implemented in 2009. However, has the promotion of cross-border renminbi settlement achieved the expected policy goals, and what impact does it have on the economic behavior of exporting firms？ In this study, we examine the impact of cross-border renminbi settlement on the innovation of exporting firms. First, we construct a simplified theoretical model and finds that firms will actively expand their innovation activities to improve productivity under the incentive of higher expected profit targets, as they seek the marginal expected profit increase brought by domestic currency settlement. We then use the policy as a quasi-natural experiment and based on a manually collected list of firms participating in the pilot cross-border renminbi settlement program, we conduct our analysis using the difference-in-differences approach. The empirical results show that participating in cross-border renminbi settlement significantly stimulates innovation in exporting firms. The effect is more pronounced when these firms are more dependent on export revenue, have a larger proportion of exports to non-dominant currency economies, and face more severe currency mismatches. A channel analysis indicates that using domestic currency settlement can overcome the stochastic characteristics of export revenue, leading to a reduction in expected losses and volatility. We also find that using renminbi settlement can improve productivity, while the cost markup rate does not change significantly. The contributions of our study are as follows. First, unlike other studies of the internationalization of the renminbi that mainly conduct qualitative or theoretical model analyses, we quantitatively examine the innovation incentive effects of the cross-border renminbi settlement policy on Chinese exporting firms. This novel approach provides micro empirical evidence of the issues related to cross-border renminbi settlement and has important policy implications for the orderly promotion of renminbi internationalization. Second, the choice of settlement currency has received increasing attention. Some scholars propose the dominant currency settlement theory to explain the popularity of the U.S. dollar, arguing that using the dollar can reduce transaction costs and optimize firms' resource allocation. However, most of these studies are theoretical. Our study provides empirical evidence and extends the theoretical understanding of settlement currency. Third, we contribute to the limited research into the relationship between settlement currency and firm innovation. The literature on the incentive effect of settlement currency and firm-level bargaining power is mainly limited to theoretical analysis or survey questionnaires, thus lacking quantitative testing using large samples. We therefore provide a valuable extension to this research.
袁凯彬, 李万利, 张伟俊. 人民币参与国际结算能否激励出口企业创新？ ——基于跨境贸易人民币结算试点的研究[J]. 金融研究, 2023, 516(6): 94-112.
YUAN Kaibin, LI Wanli, ZHANG Weijun. Does Renminbi Internationalization Foster Exporting Firm Innovation？ Evidence from the Pilot Program of Cross-border Trade Settlement in Renminbi. Journal of Financial Research, 2023, 516(6): 94-112.
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