Journal Article

The Decision to Import Capital Goods in India: Firms' Financial Factors Matter

Maria Bas and Antoine Berthou

in The World Bank Economic Review

Published on behalf of World Bank

Volume 26, issue 3, pages 486-513
Published in print January 2012 | ISSN: 0258-6770
Published online February 2012 | e-ISSN: 1564-698X | DOI: http://dx.doi.org/10.1093/wber/lhs002
The Decision to Import Capital Goods in India: Firms' Financial Factors Matter

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Are financial constraints preventing firms from importing capital goods? Sourcing capital goods from foreign countries is costly and requires internal or external financial resources. A simple model of foreign technology adoption shows that credit constraints act as a barrier to importing capital goods under imperfect financial markets. In our study, we investigate this prediction using detailed balance-sheet data from Indian manufacturing firms having reported information on financial statements and imports by type of good over the period 1997–2006. Our empirical findings shed new light on the micro determinants of firms' choices to import capital goods. Baseline estimation results show that firms with a lower leverage and higher liquidity are more likely to source their capital goods from foreign countries. Quantitatively, a 10 percentage point improvement of the leverage or liquidity ratio increases the probability of importing capital goods by 11 percent to 13 percent respectively. Different robustness tests demonstrate that these results are not driven by omitted variable bias related to changes in firm observable characteristics as well as ownership status. These findings are also robust to alternative specifications dealing with the potential reverse causality issues.

Keywords: F10; F14; D92

Journal Article.  10585 words.  Illustrated.

Subjects: development planning and policy

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