Financial Constraints and Exports

Abstract

How do firms' financial constraints, which restrict their borrowing, dynamically impact exports? This paper finds that after controlling for the endogeneity of financial constraints, constrained firms are less likely to export, and relaxing financial constraints leads to an increase in exports. In the model, imperfect contract enforceability restricts firms' borrowing. Firms use retained earnings to accumulate capital, relax financial constraints, and start exporting. Variations in firm age and financial environments can be used to solve the endogeneity problem of financial constraints. Using a firm-level data set in 26 developing countries between 2001 and 2013, we empirically find that constrained firms are 61.5% less likely to export, constrained exporters export 74.2% less, and relaxing financial constraints increases firms' exports. These results suggest that developing countries need to improve financial environments in ways besides currently used export-stimulating policies.

Keywords: Financial constraint, Export, Imperfect contract enforceability, Firm growth, Financial development

JEL Classification: F12, F14, F15, F17, F36, F60