Credit Constraints, Heterogeneous Firms and International Trade
TL;DR: This article examined the detrimental consequences of financial market imperfections for international trade and developed a heterogeneous-firm model with countries at different levels of financial development and sectors of varying financial vulnerability.
Abstract: This paper examines the detrimental consequences of financial market imperfections for international trade. I develop a heterogeneous-firm model with countries at different levels of financial development and sectors of varying financial vulnerability. Applying this model to aggregate trade data, I study the mechanisms through which credit constraints operate. First, financial development increases countries' exports above and beyond its impact on overall production. Firm selection into exporting accounts for a third of the trade-specific effect, while two thirds are due to reductions in firm-level exports. Second, financially advanced economies export a wider range of products and their exports experience less product turnover. Finally, while all countries service large destinations, exporters with superior financial institutions have more trading partners and also enter smaller markets. All of these effects are magnified in financially vulnerable sectors. These results have important policy implications for less developed economies that rely on exports for economic growth but suffer from poor financial contractibility.
Figures (12)
Table 10. Economic Significance: Predicted vs. Actual Trade Growth 
Table 9. Economic Significance: Comparative Statics 
Table 5. Financial Development and Firm-Level Exports 
Figure 3. The Productivity Cut-off for Exporting 
Table 5. Financial Development and Firm-Level Exports 
Table 1. Export Patterns in the Data 
Table 8. Financial Development and Trade Partners 
Table 2. Financial Development and Export Volumes 
Table 6. Financial Development and Export Product Variety 
Table 3. Financial Development and Export Volumes: Robustness 
Table 7. Financial Development and Export Product Churning 
Table 4. Financial Development and Firm Selection into Exporting
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TL;DR: In this paper, the impact of trade frictions on trade flows can be decomposed into the intensive and extensive margins, where the former refers to the trade volume per exporter and the latter referred to the number of exporters.
Abstract: We develop a simple model of international trade with heterogeneous firms that is consistent with a number of stylized features of the data In particular, the model predicts positive as well as zero trade flows across pairs of countries, and it allows the number of exporting firms to vary across destination countries As a result, the impact of trade frictions on trade flows can be decomposed into the intensive and extensive margins, where the former refers to the trade volume per exporter and the latter refers to the number of exporters This model yields a generalized gravity equation that accounts for the self-selection of firms into export markets and their impact on trade volumes We then develop a two-stage estimation procedure that uses an equation for selection into trade partners in the first stage and a trade flow equation in the second We implement this procedure parametrically, semiparametrically, and nonparametrically, showing that in all three cases the estimated effects of trade frictions are similar Importantly, our method provides estimates of the intensive and extensive margins of trade We show that traditional estimates are biased and that most of the bias is due not to selection but rather due to the omission of the extensive margin Moreover, the effect of the number of exporting firms varies across country pairs according to their characteristics This variation is large and particularly so for trade between developed and less developed countries and between pairs of less developed countries
2,282 citations
TL;DR: This article developed a model co-determining aggregate total factor productivity (TFP), sectoral TFP, and scales across industrial sectors and found that financial frictions disproportionately affect TFP in tradable sectors where production requires larger costs.
Abstract: Explaining levels of economic development hinges on explaining TFP dierences across coun- tries. In poor countries, total factor productivity (TFP) is particularly low in sectors producing tradable goods. We document that an important dierence between tradable and non-tradable sectors is their average establishment size: Tradable establishments operate at much larger scales. We develop a model co-determining aggregate TFP, sectoral TFP, and scales across industrial sectors. In our model, …nancial frictions disproportionately aect TFP in tradable sectors where production requires larger …xed costs. Our quantitative exercises show that …- nancial frictions explain a substantial part of the observed cross-country relationship between aggregate TFP, sectoral TFP, and output per worker.
884 citations
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TL;DR: In this article, a causal link between the health of banks providing trade finance and growth in a firm's exports relative to its domestic sales is established, suggesting that trade finance accounts for about one-third of the decline in Japanese exports in the financial crises of the 1990s.
Abstract: A striking feature of many financial crises is the collapse of exports relative to output In the 2008 financial crisis, real world exports plunged 17 percent while GDP fell 5 percent This paper examines whether the drying up of trade finance can help explain the large drops in exports relative to output This paper is the first to establish a causal link between the health of banks providing trade finance and growth in a firm’s exports relative to its domestic sales We overcome measurement and endogeneity issues by using a unique data set, covering the Japanese financial crises of the 1990s, which enables us to match exporters with the main bank that provides them with trade finance Our point estimates are economically and statistically significant, suggesting that trade finance accounts for about one-third of the decline in Japanese exports in the financial crises of the 1990s
608 citations
TL;DR: This article studied the collapse of international trade flows during the global financial crisis using detailed data on monthly US imports and showed that credit conditions were an important channel through which the crisis affected trade volumes, by exploiting the variation in the cost of capital across countries and over time.
Abstract: We study the collapse of international trade flows during the global financial crisis using detailed data on monthly US imports. We show that credit conditions were an important channel through which the crisis affected trade volumes, by exploiting the variation in the cost of capital across countries and over time, as well as the variation in financial vulnerability across sectors. Countries with higher interbank rates and thus tighter credit markets exported less to the US during the peak of the crisis. This effect was especially pronounced in sectors that require extensive external financing, have limited access to trade credit, or have few collateralizable assets. Exports of financially vulnerable industries were thus more sensitive to the cost of external capital than exports of less vulnerable industries, and this sensitivity rose during the financial crisis. The quantitative implications of our estimates for trade volumes highlight the large real effects of financial crises and the potential gains from policy intervention.
591 citations
TL;DR: A review of empirical evidence on firm heterogeneity in international trade can be found in this article, where a first wave of empirical findings from micro data on plants and firms proposed challenges for existing models of international trade and inspired the development of new theories emphasizing firm heterogeneity.
Abstract: This paper reviews the empirical evidence on firm heterogeneity in international trade. A first wave of empirical findings from micro data on plants and firms proposed challenges for existing models of international trade and inspired the development of new theories emphasizing firm heterogeneity. Subsequent empirical research has examined additional predictions of these theories and explored other dimensions of the data not originally captured by them. These other dimensions include multi-product firms, offshoring, intra-firm trade and firm export market dynamics.
511 citations
Cites background or methods from "Credit Constraints, Heterogeneous F..."
...…frictions (Amiti & Davis 2011, Egger & Kreickemeier 2009, Helpman and Itskhoki 2010, and Helpman et al. 2011), and nancial constraints (Chaney 2005, Manova 2011), among other issues.1 We begin by reviewing the empirical challenges to traditional theories of international trade that emerged from…...
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...For instance, Manova and Zhang (2011) use Chinese trade transaction data to highlight a number of systematic features of exports and imports by rm, product and destination that are consistent with heterogeneity in product quality....
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...Manova (2011) develops a heterogeneous- rm model, in which countries vary in nancial development and sectors di er in nancial vulnerability, and provides empirical evidence on the model's predictions....
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...For instance, Manova and Zhang (2011) use Chinese trade transaction data to highlight a number of systematic features of exports and imports by rm, product and destination that are consistent with heterogeneity in product quality.(14) For example, across rms selling a given product, rms that charge higher export prices earn greater revenues in each destination, have bigger worldwide sales, and export to more markets. Across destinations within a rm-product, rms set higher prices in richer, larger, bilaterally more distant and overall less remote countries. Finally, rms that export pay a wider range of input prices and source inputs from more countries. Taken together these features of the data are consistent with a heterogeneous rm model where more successful exporters use higher-quality inputs to produce higher-quality goods and rms vary the quality of their products across destinations. Using Colombian census of manufactures data, Kugler & Verhoogen (2011) provide evidence of di erences in product quality and highlight the relationship between rm export and import decisions....
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...Manova (2011) develops a heterogeneous- rm model, in which countries vary in nancial development and sectors di er in nancial vulnerability, and provides empirical evidence on the...
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References
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TL;DR: This paper examined legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries and found that common law countries generally have the best, and French civil law countries the worst, legal protections of investors.
Abstract: This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.
14,563 citations
"Credit Constraints, Heterogeneous F..." refers background or methods in this paper
...Corruption and rule of law: from La Porta et al. (1998)....
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...For robustness I also use indices for the repudiation of contracts, accounting standards, and the risk of expropriation from La Porta et al. (1998)....
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TL;DR: In this article, the authors examined legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries and found that common-law countries generally have the strongest, and French civil law countries the weakest, legal protections of investors, with German- and Scandinavian-civil law countries located in the middle.
Abstract: This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common-law countries generally have the strongest, and Frenchcivil-law countries the weakest, legal protections of investors, with German- and Scandinavian-civil-law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.
13,984 citations
TL;DR: This paper developed a dynamic industry model with heterogeneous firms to analyze the intra-industry effects of international trade and showed how the exposure to trade will induce only the more productive firms to enter the export market (while some less productive firms continue to produce only for the domestic market).
Abstract: This paper develops a dynamic industry model with heterogeneous firms to analyze the intra-industry effects of international trade. The model shows how the exposure to trade will induce only the more productive firms to enter the export market (while some less productive firms continue to produce only for the domestic market) and will simultaneously force the least productive firms to exit. It then shows how further increases in the industry's exposure to trade lead to additional inter-firm reallocations towards more productive firms. The paper also shows how the aggregate industry productivity growth generated by the reallocations contributes to a welfare gain, thus highlighting a benefit from trade that has not been examined theoretically before. The paper adapts Hopenhayn's (1992a) dynamic industry model to monopolistic competition in a general equilibrium setting. In so doing, the paper provides an extension of Krugman's (1980) trade model that incorporates firm level productivity differences. Firms with different productivity levels coexist in an industry because each firm faces initial uncertainty concerning its productivity before making an irreversible investment to enter the industry. Entry into the export market is also costly, but the firm's decision to export occurs after it gains knowledge of its productivity.
9,036 citations
TL;DR: In this paper, the authors examined a cross-section of about 80 countries for the period 1960-89 and found that various measures of financial development are strongly associated with both current and later rates of economic growth.
Abstract: Joseph Schumpeter argued in 1911 that the services provided by financial intermediaries - mobilizing savings, evaluating projects, managing risk, monitoring managers, and facilitating transactions -stimulate technological innovation and economic development. The authors present evidence that supports this view. Examining a cross-section of about 80 countries for the period 1960-89, they find that various measures of financial development are strongly associated with both current and later rates of economic growth. Each measure has shortcomings but all tell the same story: finance matters. They present three main findings, which are robust to many specification tests: The average level of financial development for 1960-89 is very strongly associated with growth for the period. Financial development precedes growth. For example, financial depth in 1960 (the ratio of broad money to GDP) is positively and significantly related to real per capita GDP growth over the next 30 years even after controlling for a variety of country-specific characteristics and policy indicators. Financial development is positively associated with both investment rate and the efficiency with which economies use capital. Much work remains to be done, but the data are consistent with Schumpeter's view that the services provided by financial intermediaries stimulate long-run growth.
8,204 citations
TL;DR: This paper examined whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms, and found that industrial sectors that are relatively more in need of foreign finance develop disproportionately faster in countries with more developed financial markets.
Abstract: Does finance affect economic growth? A number of studies have identified a positive correlation between the level of development of a country's financial sector and the rate of growth of its per capita income. As has been noted elsewhere, the observed correlation does not necessarily imply a causal relationship. This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms. Specifically, we ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more developed financial markets. We find this to be true in a large sample of countries over the 1980s. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality.
6,815 citations
"Credit Constraints, Heterogeneous F..." refers background or methods in this paper
...Rajan and Zingales (1998) and Braun (2003) argue that the measures they construct capture a large technological component that is innate to the manufacturing process in a sector and are thus good proxies for ranking industries in all countries....
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...They do not ask, however, whether this re ects the fact that nancially developed countries produce more and grow faster in such industries (Rajan and Zingales 1998; Braun 2003; Fisman and Love 2007)....
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...The relative importance of up-front costs varies across sectors for technological reasons speci c to the nature of each industry, as argued by Rajan and Zingales (1998)....
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...Private credit has been used extensively in the nance and growth literature (Rajan and Zingales 1998; Braun 2003; Aghion et al. 2010), as well as in most papers on nance and trade....
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...5For example, Rajan and Zingales (1998), Fisman and Love (2007), and Braun (2003) show that sectors intensive in outside nance and sectors with few collateralizable assets grow faster in nancially developed countries....
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