Internal Capital Market and Total Factor Productivity

ABSTRACT This study investigates the relationship between the Internal capital market (ICM) and firm‐level total factor productivity (TFP), addressing a gap in the literature regarding the ICM's role in labor value creation, technological innovation, and capital allocation. Using hand‐collected ICM data on Chinese‐listed firms from 2007 to 2018, we find that the ICM significantly enhances firm‐level TFP. Further analysis reveals that financial constraints and innovation serve as the primary channels through which the ICM influences TFP. Heterogeneity analysis indicates that the strength of this effect varies with monetary policies, factor market maturity, and the firm's labor capital intensity. These findings highlight the ICM's potential to improve economic efficiency and offer policy implications for fostering sustainable development.