Credit Constraints, Heterogeneous Firms and International Trade
46 Pages Posted: 19 Dec 2006 Last revised: 10 Oct 2011
There are 2 versions of this paper
Credit Constraints, Heterogeneous Firms and International Trade
Credit Constraints, Heterogeneous Firms, and International Trade
Date Written: October 8, 2011
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.
Keywords: Credit constraints, financial development, heterogeneous firms, trade margins, product variety, product dynamics, trade partners
JEL Classification: F10, F14, F36, G20, G28, G32
Suggested Citation: Suggested Citation
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