The standard Heckscher-Ohlin model predicts that a country rich in labor, natural resources, physical or human capital has a comparative advantage in goods intensive in the abundant input factors. This view abstracts from market frictions that may arise from agency problems, and presumes that entrepreneurs can enter any industry regardless of its need for outside finance or endowment of collaterizable assets.
In the presence of financial frictions, however, borrowing constraints will vary across industries and affect the sectoral composition of a country's exports by limiting the investment opportunities open to producers with insufficient private capital.
A small but growing literature on finance and trade has indeed found suggestive evidence of an additional comparative advantage channel based on the level of financial development. In particular, a number of papers have argued that financially developed countries export relatively more in sectors that require more outside finance.
However, the cross-sectional approach and focus on worldwide exports by sector in these studies has made it difficult to establish a causal link from finance to growth. Moreover, the financial channel has been confounded with the effects of other institutions, making the results difficult to interpret.
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Credit Constraints in Trade: Financial development and export composition
