Credit Constraints, Heterogeneous Firms, and International Trade

NBER WORKING PAPER SERIES
CREDIT CONSTRAINTS, HETEROGENEOUS FIRMS, AND INTERNATIONAL TRADE Kalina Manova Working Paper 14531 /papers/w14531 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 December 2008
1
Introduction
A growing body of work has argued that, in the presence of credit constraints, …nancially advanced economies have a comparative advantage in …nancially vulnerable industries. These studies have emphasized the variation in export values across countries and sectors, but ignored the e¤ects of …nancial frictions on di¤erent trade margins and on overall production. On the other hand, a large literature has highlighted the importance of reallocations across …rms and across products and trade partners within …rms for aggregate trade and the adjustment to trade reforms. While …rm heterogeneity has been successfully used to rationalize aggregate export outcomes, its consequences in the presence of imperfect …nancial markets have not been explored. This paper provides an overall treatment of the e¤ect of …nancial frictions on international trade in order to elucidate the mechanisms through which it operates. I develop a heterogeneous…rm model with countries at di¤erent levels of …nancial development and sectors of varying …nancial vulnerability. Using model-consistent estimation, I show empirically that credit constraints severely impede …rm selection into exporting and restrict …rms’sales abroad. Financial development thus allows countries to expand aggregate exports, broaden their export product scope, enter more foreign markets, and reduce product churning. These e¤ects are magni…ed in …nancially vulnerable industries. Importantly, the impact of credit constraints on trade goes above and beyond that on overall production. These results have signi…cant policy implications for less developed economies, many of which rely heavily on exports for economic growth but su¤er from ine¢ cient …nancial markets. In the model, credit constraints a¤ect manufacturers in di¤erent countries and sectors unevenly. First, for technological reasons, producers in certain industries require more external …nance to fund their export activities. Sectors also di¤er in …rms’endowments of tangible assets that can serve as collateral. Second, …nancial frictions vary across countries because contracts between entrepreneurs and investors are more likely to be enforced at higher levels of …nancial development. Exporters in …nancially vulnerable sectors are thus less credit constrained in economies with stronger …nancial contractibility. Credit constraints also interact non-trivially with …rm heterogeneity and reinforce the selection of only the most productive …rms into exporting: Because more e¢ cient suppliers earn higher revenues, they can o¤er …nanciers greater returns and are more likely to secure the external capital necessary to sell abroad. As a result, the productivity cut-o¤ for exporting as well as …rm-level exports vary systematically across exporting countries and sectors. These movements in turn in‡ uence a number of other trade features. I …nd strong support for the model’ s predictions in a panel of bilateral exports for 107 countries and 27 ISIC 3-digit sectors in 1985-1995. I study how interactions of country measures of …nancial development (private credit, contract repudiation, accounting standards, risk of expropriation) and sector indicators of …nancial vulnerability (external …nance dependence, asset tangibility) predict di¤erent export outcomes. Exploiting the variation across both cpe Aghion, Pol Antras, Elhanan Helpman, and Marc Melitz for their invaluable guidance. I also thank Andrew Bernard, Doireann Fitzgerald, Dirk Jenter, and Luigi Zingales for insightful conversations, and seminar participants at Boston College, Brown, Cornell, Dartmouth, Harvard, Harvard Business School, Harvard Kennedy School of Government, Kellogg Northwestern, London School of Economics, New York Federal Reserve Bank, MIT Sloan School of Management, Ohio State, Pennsylvania State, Stanford, Toronto, University of Illinois at Urbana-Champaign, University of North Carolina at Chapel Hill, University of California at Davis, San Diego and Santa Cruz for their comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. © 2008 by Kalina Manova. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.