Abstract: The combination of operating profit and financial investment is considered as an important way to improve China's manufacturing industry. This paper focuses on the geographical characteristics and discusses the effect of regional differences on the selection and efficiency of resource allocation between financial investment and operating profit. The results of this paper show that the higher operating income is earned by companies in eastern China, the larger investment will be made in financial assets, but the "squeezing effect" of financial assets on operating profit is more significant in western China. The indicators of these differences can be explained by the soft environmental indicators, namely, the degree of regional financial market development and the level of local government intervention. The negative effect of "squeezing effect" on operating profit is gradually declining as the degree of development of financial markets increases and the level of local government intervention declines, which indicates that improvements in government and market conditions can significantly improve the efficiency of resource allocation between finance and entities. This paper believes that improving the soft environment in backward areas can help pull manufacturing enterprises away from fictitious economy and toward substantial economy".

Key words: operating profit, financial investment, degree of regional financial market development, level of local government intervention