Chinese Import Competition and the Provisions for External Debt Financing in the US

Journal of International Business Studies (2016) 47, 898–928.

Posted: 25 Nov 2019

See all articles by Mohammad M. Rahaman

Mohammad M. Rahaman

Saint Mary's University - Sobey School of Business

Date Written: October 15, 2016

Abstract

How does international competition originating from low-wage countries affect domestic financing capacity of firms in high-wage countries? In this article, we use China’s entry into the World Trade Organization (WTO) as a quasi-natural experiment to investigate the effects of trade-induced competition originating from China on the price and design of bank-loan contracts for firms in US manufacturing industries. We find that the elevated level of Chinese import competition in the US, following China’s WTO entry, is associated with a reduction in the overall cost of bank financing for import-competing US manufacturing firms, evidenced by lower spread, higher amount, longer maturity, and less restrictive non-price contract terms such as collateral and covenants. We show that such reduction in the external financing premiums of import-competing firms is the result of trade-induced productivity gains within firms and a reallocation of financing between firms towards more capital-intensive and technologically advanced firms. These results suggest that engaging in international business activities with a low-wage country via trade openness is likely to ease the provisions of external debt financing for firms in high-wage countries.

Keywords: Globalization, Import competition, Cost of capital, China

JEL Classification: F10, F65, G21, G30, G32

Suggested Citation

Rahaman, Mohammad M., Chinese Import Competition and the Provisions for External Debt Financing in the US (October 15, 2016). Journal of International Business Studies (2016) 47, 898–928.. Available at SSRN: https://ssrn.com/abstract=3485993

Mohammad M. Rahaman (Contact Author)

Saint Mary's University - Sobey School of Business ( email )

Halifax, Nova Scotia B3H 3C3
Canada

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