Firm Exports and Processing Trade under Credit Constraints

Abstract

We provide firm-level evidence that processing trade helps relax the restriction of credit constraints on exports. We show that firms with higher processing trade share have better export performance than those with lower processing trade share in financially more vulnerable sectors. The results are not driven by firm size, time, or other sector characteristics. Our findings are consistent with the fact that processing trade is less credit-constrained because it entails lower upfront costs and thus has less working capital needs. Our findings, thus, highlight the importance of processing trade in firm exports, particularly in developing countries with imperfect capital markets.

Keywords: Credit Constraints; Processing Trade; Exports

JEL Classification: F1; G2