Effects of Financial Market Imperfections on Indian Firms’ Exporting Behavior

50 Pages Posted: 14 Jul 2011

See all articles by Hiro Ito

Hiro Ito

Portland State University - Department of Economics

Akiko Terada-Hagiwara

Asian Development Bank

Date Written: May 1, 2011

Abstract

Using data from more than 6,000 manufacturing firms in India for 1996-2008, we investigate the impact of financial constraints on the exporting behavior of Indian manufacturing firms while also focusing on the link between exchange rate movement and exports. We find that there is a strong degree of persistency in the exporting behavior of Indian manufacturing firms, reflecting the high fixed costs of entering foreign markets for Indian firms. A firm with a higher amount of net cash flows and smaller debt-to-asset ratios is more likely to become an exporter, indicating that a firm tends to self-finance its exporting without relying too much on external finances. Internal funds are especially important for firms that are not incumbent exporters to become exporters, and also for firms that do not enjoy technical advancement and high levels of productivity. When we divide the sample period into several subperiods, Indian firms have become less reliant on internal cash in recent years, but new exporters still rely on cash holdings to enter foreign markets. Over all, recent financial liberalization in India still does not allow the financial system to meet the stronger demand for funds by firms, especially small ones, though part of the stronger demand for funds are increasingly met by funds provided by foreign institutions. Based on our findings, improving the functionality of financial markets is an urgent issue to remove financial constraints that hinder Indian firms from entering export markets.

Keywords: India, firm-level analysis, hysteresis hypothesis, financial constraint, market imperfection, Economics Working Paper No. 256

JEL Classification: F19, F36, G32, O16

Suggested Citation

Ito, Hiro and Terada-Hagiwara, Akiko, Effects of Financial Market Imperfections on Indian Firms’ Exporting Behavior (May 1, 2011). Asian Development Bank Economics Working Paper Series No. 256. Available at SSRN: https://ssrn.com/abstract=1884672 or http://dx.doi.org/10.2139/ssrn.1884672

Hiro Ito (Contact Author)

Portland State University - Department of Economics ( email )

Portland, OR 97207-0751
United States
503-725-3930 (Phone)
503-725-3945 (Fax)

HOME PAGE: www.econ.pdx.edu

Akiko Terada-Hagiwara

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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