Credit Constraints, Heterogeneous Firms and International Trade

Abstract:     
Three fundamental features of international trade flows are a predominance of zeros in the bilateral trade matrix, great variation in the number of products countries export, and substantial turnover in the product mix of exports over time. This paper provides evidence that credit constraints are an important determinant of all three patterns. I develop a model of credit-constrained heterogeneous firms, countries at different levels of financial contractibility, and sectors of varying financial vulnerability, and find strong empirical support for the model's predictions. First, I show that financially developed countries are more likely to export bilaterally and ship greater volumes when they become exporters. This effect is more pronounced in sectors with a greater requirement for outside finance or fewer collateralizable assets. Firm selection into exporting accounts for a third of the effect of credit constraints on export volumes, whereas two thirds are due to the impact on firm-level exports. Second, in financially vulnerable sectors, financially developed countries export a wider variety of products and experience less product turnover in their exports over time. Finally, credit constraints lead to a pecking order of trade. While all countries export to large destinations, financially advanced countries have more trading partners and also export to smaller import markets, especially in financially vulnerable sectors.

Keywords: Credit constraints, financial development, heterogeneous firms, margins of export, product variety, product dynamics, trade partners, pecking order of trade

JEL Classifications: F10, F14, F36, G20, G28, G32

Working Paper Series