This paper studies the effects of financial market imperfections on a firm’s operating and exporting decisions. I introduce financial frictions into a trade model with heterogeneous firms along the line of Melitz (2003). With the presence of financial constraints, even among a group of firms with the same productivity level, firms that are more financially constrained operate on a less efficient scale, and as a result, may no longer find operating and/or exporting profitable. In addition, financial frictions may create a distortion compared to the Melitz (2003) world since operation and export participation may be undertaken by those with better access to finance than by those with higher productivity. Furthermore, financial frictions can have persistent effects on firms’ dynamics. Productive firms with very low starting net worth will never accumulate enough to overcome credit constraints and, therefore, will never start operating and, subsequently, never export even if they are very productive. Using data from the World Bank Enterprise Surveys for Brazil and Chile, I find evidence that supports the model’s prediction that exporters are likely those that are less financially constrained even after controlling for productivity and sectoral effects.
financial frictions, borrowing constraints, firm heterogeneity, export participation
Finance | International Economics
Financial Intermediation Research Society Conference
City or Country
Financial Frictions and International Trade. (2012). Financial Intermediation Research Society Conference. Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/1340