Firm level trade data have become available in recent years and suggest new stylized facts about firms’ exporting behavior which challenges standard trade theory. With cross-country, firm level panel data, I deduce new stylized facts about exports and financial constraints: both the probability of exporting and exporting volume increase with firms’ age after controlling for productivity. Firms tend to export and export more if they are not financially constrained, after controlling for both age and productivity. Standard models assume that the financial market is complete that firms can borrow with no financial frictions and immediately achieve the optimal level after entrance. Therefore standard models have no implications for the growth process of exportation. This paper develops a model with credit constrained heterogeneous firms to explain how financial constraints impact exportation and tests its implications with the World Bank’s Enterprise Surveys.
This model describes how firms relax their financial constraints and grow over time such that they are more able to export. In it, entrepreneurs have no wealth and need to borrow the initial sunk investment, fixed cost, and first period capital input from a financial intermediary in order to start up a firm. Firms then pay back loans and use their previous period operating returns to finance their fixed cost and need for further capital. Firms are heterogeneous in productivity, which is individually and independently drawn from a distribution, and these firms are only able to export after paying a fixed cost.
Firms may default in any period and run away with their current stock of capital; financial intermediaries, however, fully commit to the contract in the perfectly competitive lending market. In order to force firms not to default, the financial intermediary lends firms fewer funds than the optimal capital level in the initial period, otherwise these firms would strategically default—the deviation benefit would dominate their return on production with relatively low productivity. However, with firms accumulating capital in every period, they are finally unconstrained and are thus more able to export, on average.
In order to define the financial status of a firm, I compare the benchmark model with another, identical to the benchmark except that contracts are fully enforceable. In other words, the entrepreneurs fully commit to the contract. All firms reach their optimal capital level immediately after the entrance. I define firms as financially constrained if their capital level is below the optimum under perfect enforceability. The model with imperfect enforceability suggests that firms export more if they are not financially constrained; given the status of financial constraint, the probability of exporting and the export volume grow with firm age. The model also suggests that the financial constraints have attenuated effects in financially developed countries. By contrast, in a model with perfect enforceability, firms’ exporting behavior is irrelevant to their financial conditions; after controlling for firms’ productivity, firms’ exporting behavior should be identical across countries.
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Financial Constraints and Exports
