A large body of literature suggests that access to financing is important determinant of firm investments (Stiglitz and Weiss, 1981; Fazzari and Hubbard, 1988; Evans and Jovanovic, 1989; Bond, 1994; Dixit and Pindyck, 1994; Hubbard, 1998). Cabral and Mata (2003) argue that expansion of small firms is hampered by firms financial constraints resulting in observed right skewed firm size distribution. Financial factors are also shown to be important in explaining the patterns of international trade. Chaney (2005) has shown theoretically that in the presence of large fixed cost of exporting access to financing may explain part of the variation in the foreign market participation. Greenaway, Guariglia and Kneller (2007) confirm this prediction for a set of UK manufacturing firms. Further, Zia (2008) reports that removal of subsidized credit causes a significant decline in the exports of privately owned Pakistani firms, while the exports of large, publicly listed, and group network firms remain unaffected. In a similar vein, Bellone, Musso, Nesta and Schiavo (2000) demonstrate that less financially constrained Italian firms are more likely to start exporting earlier, but that exporting per se does not improve financial health of exporters.
They also find, taking export intensity as a proxy for serving a large number of destinations, a negative relationship between access to financing and export intensity. The reasoning for the latter is straightforward. Further expansion of exporters to new foreign markets as well as the introduction of new products to the existing markets is associated with significant sunk cost. Financial constraints will therefore provide an important barrier not only to the entry into export markets, but also to new exporterso expansion dynamics in foreign markets. Damijan, Kostevc and Polanec (2010) show that Slovenian firms with higher debt to asset ratio tend to export greater number of products to greater number of markets. In both cases, firm size is shown to be positively correlated with the expansion dynamics of new exporters.
These findings suggest that expansion of exports may take different patterns for exporters of different size. While for large firms export expansion is likely to be monotonic due to their larger internal funds and better access to external finance, this pattern might be non monotonic for small exporters. First reason is that small exporters may have weaker access to external finance or have to pay a higher finance premia. The speed of foreign market expansion is therefore constrained by the internal funds available to them. Another important issue, however, relates to a famous remark by Knight (1921) who argues that bearing risk is one of the essential characteristics of entrepreneurship. As noted by Bond, Tybout and Utar (2008), the households with lower relative risk tolerence shy away from business ventures during the periods of excessive macro volatility. Similarly, due to fixed costs associated with exporting, small firms bear higher risk of failure and are therefore less prone to take risks related to exporting. Hence self restraint may play an important role in foreign market participation, particularly for small firms.
This means that, for the same levels of external financing, small firms will export a smaller share of their total sales. Furthermore, small firms may expand to a lesser extent than large firms even if they are not liquidity constrained. Smaller size of internal funds and the risk of failure will make smaller exporters to be more cautious in terms of taking additional risks associated with increased export intensity. On the other hand, small firms willing to risk by taking external finance may well use the additional funds more efficiently. Bond, Tybout and Utar (2008) show that households with promising business opportunities and modest wealth would be the main beneficiaries of better functioning credit markets. However, there is a limit in terms of export expansion also for risk loving small exporting firms. Eaton, Eslava, Kugler and Tybout (2007), Bernard, Jensen, Redding and Schott (2007, 2009) and Damijan, Kostevc and Polanec (2010), report that small firms typically serve only one or two foreign markets with a handful of products. This, in turn, makes them relatively more vulnerable to the potential failure in the export markets. Large firms can take on the extensive geographic dispersion of export markets and a large variety of products exported as a significant insurance against the risk of failure in a single foreign market or in a single product exported. Small firms do not enjoy a similar comfort. A failure in any of the export projects can be terminal for a small firm leading to its exit from the export market, and consequently, due to the excessive indebtedness, also driving it out of the business altogether.
Drawing a correlation between the level of external debt and export intensity, a monotonic relationship is likely to be found for large firms, while for small firms a relationship in the form of an inverted U$shape is more likely to be found. The right tail will consist of firms that have taken on the excessive debt, but have failed in their endeavour in the export markets. As a consequence, export share diminishes and the debt to asset ratio rises significantly.
In this paper, we analyze this relationship between the extent of liquidity constraints and the intensive margin of exports for firms of different size. We use firm level balance sheet data with detailed information on financing for a set of Slovenian firms for the period 2001 2008. We take firmos own cash flow as its main internal source of liquidity. Among the external sources of finance, we make use of the information on short and long term borrowing from the banking sector and information on borrowing in the internal credit market for firms in the network group. Our main goal is to test whether, for the firms with the same expected debt to assets ratio, small exporting firms experience different pattern of export expansion than their medium and large$sized counterparts. We aim to show that firms with higher debt to assets ratio increase export intensity and that this response varies between firms of different size. Our main econometric tool employed is continuous matching technique based on the generalised propensity score and the relevant dose response functions (Imbens 2000, Hirano, Imbens 2004). As a robustness check we also use standard regressions. In our empirical excersises, several alternative measures of liquidity constraints are used, although the key findings remain the same. In terms of export intensity expansion, small firms are shown to benefit the most of all groups from taking additional bank loans, while medium sized firms do rely more on financing in the internal credit markets. Large firms increase their export intensity monotonically with the increase in both sources of external financing.
The paper is organized as follows. Section 2 discusses the conceptual framework of the paper. Section 3 presents the datasets used and some basic descriptive statistics. Section 4 discusses the empirical methodology employed in the paper. Section 5 presents main empirical results of the paper and the last Section concludes.
Download
PDF Ebook Firm size, financial constraints and intensive export margin
