Don't Throw in the Towel, Throw in Trade Credit!
42 Pages Posted: 25 Sep 2014 Last revised: 29 Jan 2018
Date Written: September 2014
The literature has documented how firms adjust to increased competitive pressures arising from globalization. This paper demonstrates a new margin of adjustment, namely, provision of trade credit. A simple model predicts that an increase in competitive pressures will lead exporters to provide trade credit and lower prices and that the price adjustment will be attenuated by trade credit provision. These predictions are tested in the context of an exogenous shock, the end of the Multi-Fiber Arrangement (MFA), a quota system governing trade in textiles and clothing until the end-2004. The analysis focuses on Turkey which was not subject to quotas in the EU and thus faced an increase in competition after the quotas on China had been removed. The results suggest that in the post-MFA period Turkish exports of products with binding MFA quotas prior to the shock saw an increase in the provision of trade credit and a drop in prices relative to the other products. There is also evidence that provision of trade credit generated a dampening effect on the price response to the increase in competition.
Keywords: competition, export financing, Multi-Fibre Arrangement, trade credit, Turkey
JEL Classification: F13, F14, F15
Suggested Citation: Suggested Citation