Financial Development and the Choice of Trade Partners

39 Pages Posted: 28 Feb 2013 Last revised: 14 Apr 2015

See all articles by Jackie Chan

Jackie Chan

The Chinese University of Hong Kong (CUHK)

Kalina Manova

University College London - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 31, 2015

Abstract

What determines the choice of countries' trade partners? We show theoretically and empirically that financial market imperfections affect the number and identity of exporters' destinations. Bigger economies with lower trade costs are more attractive markets because they offer higher export profits. This generates a pecking order of destinations such that firms serve all countries above a cut-off level of market potential. Credit constraints, however, raise this cut-off above the first best. Financially advanced nations thus have more trade partners and go further down the pecking order, especially in sectors that rely heavily on the financial system. Our results provide new, systematic evidence that countries follow a hierarchy of export destinations, that market size and trade costs determine this hierarchy, and that financial frictions interact importantly with it. This has policy implications for the effects of cross-border linkages that depend on the number and identity of countries' trade partners.

Keywords: financial development, international trade, trade partners, pecking order

JEL Classification: F10, F14, F36, G20

Suggested Citation

Chan, Jackie and Manova, Kalina B., Financial Development and the Choice of Trade Partners (March 31, 2015). Journal of Development Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2226081 or http://dx.doi.org/10.2139/ssrn.2226081

Jackie Chan

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

Kalina B. Manova (Contact Author)

University College London - Department of Economics ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

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