How Firms Export: Processing vs. Ordinary Trade with Financial Frictions

50 Pages Posted: 13 Apr 2016

See all articles by Kalina Manova

Kalina Manova

University College London - Department of Economics

Zhihong Yu

University of Nottingham - Leverhulme Centre for Research on Globalisation and Economic Policy (GEP)

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Date Written: March 10, 2016

Abstract

The fragmentation of production across borders allows firms to make and export final goods, or to perform only intermediate stages of production by processing imported inputs for re-exporting. We examine how financial frictions affect companies’ choice between processing and ordinary trade – implicitly a choice of production technology and position in global supply chains – and how this decision affects performance. We exploit matched customs and balance-sheet data from China, where exports are classified as ordinary trade, import-and-assembly processing trade (processing firm sources and pays for imported inputs), and pure-assembly processing trade (processing firm receives foreign inputs for free). Value added, profits and profitability rise from pure assembly to processing with imports to ordinary trade. However, more profitable trade regimes require more working capital because they entail higher up-front costs. As a result, credit constraints induce firms to conduct more processing trade and pure assembly in particular, and preclude them from pursuing higher value-added, more profitable activities. Financial market imperfections thus impact the organization of production across firms and countries, and inform optimal trade and development policy in the presence of global production networks.

Keywords: China, trade regime, processing trade, global value chain, credit constraints, heterogeneous firms

JEL Classification: F10, F13, F14, F23, F34, G32

Suggested Citation

Manova, Kalina B. and Yu, Zhihong, How Firms Export: Processing vs. Ordinary Trade with Financial Frictions (March 10, 2016). CESifo Working Paper Series No. 5798. Available at SSRN: https://ssrn.com/abstract=2763510

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

Zhihong Yu

University of Nottingham - Leverhulme Centre for Research on Globalisation and Economic Policy (GEP) ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

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