Financing Channels and the Performance of Chinese Small and Medium High-Tech Enterprises

China's astonishing economic growth in recent years has attracted many research interests. It is well documented that small and medium-sized enterprises have become a major driving force making China's economic miracle. Financing is critical to small business; however, there are limited studies on financing sources for Chinese small business and how different financing sources affect the performance of small business. This paper investigates the influence of different financing channels on the performance of Chinese small and medium sized high-tech enterprises. We find that small firms in China rely heavily on individual financing due to the difficulty in obtaining external financing. Our results show that individual financing is negatively related to the firm performance measured by operating revenues. In contrast, firms with foreign financing have better performance. However, one should be cautious to interpret the influence of foreign financing on firm performance. Our results also indicate that foreign financing is positively related to the probability of a firm incurring loss. On one hand, foreign ownership brings in advanced management skills and better corporate governance and thus produces high operating revenues. However, on the other hand, foreign ownership results in high operating costs due to cultural difference and adjustments to China's business environment. When costs associated with foreign financing outweigh the benefits it bring in, the firm with foreign financing will have higher probability to incur loss compared to firms financed by other channels.