Including A-shares in the MSCI index and enterprises’ Total factor productivity—impact on China's micro-enterprises

This study treats this inclusion as a quasi-natural experiment to examine all constituent stocks from 2014 to 2021. Through empirical analysis, we investigate the impact of capital market internationalization on enterprises’ total factor productivity (TFP), revealing that the inclusion significantly enhances TFP, a result that remains robust across various tests. Further analysis identifies “cost reduction” and “efficiency enhancement” as the primary mechanisms through which A-share inclusion improves TFP. Specifically, the inclusion reduces financing and transaction costs while improving investment efficiency and capital allocation efficiency, all of which contribute to higher TFP. We also observe variations in the impact of A-share inclusion on TFP across regions, industries, and firms. The positive effects are more pronounced for A-share firms located in regions with lower economic development but higher financial market development, those operating in highly competitive or high-tech industries, and those that are large and highly internationalized. This study provides a microeconomic perspective on the internationalization of China's capital market, offering insights into enhancing firms’ TFP. The findings present new strategies for A-share listed companies to improve TFP and offer empirical evidence supporting the role of capital market internationalization in driving firm development in emerging market countries.