Journal Article

Credit Constraints, Heterogeneous Firms, and International Trade

Kalina Manova

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 80, issue 2, pages 711-744
Published in print April 2013 | ISSN: 0034-6527
Published online November 2012 | e-ISSN: 1467-937X | DOI: https://dx.doi.org/10.1093/restud/rds036
Credit Constraints, Heterogeneous Firms, and International Trade

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Financial market imperfections severely restrict international trade flows because exporters require external capital. This article identifies and quantifies the three mechanisms through which credit constraints affect trade: the selection of heterogeneous firms into domestic production, the selection of domestic manufacturers into exporting, and the level of firm exports. I incorporate financial frictions into a heterogeneous-firm model and apply it to aggregate trade data for a large panel of countries. I establish causality by exploiting the variation in financial development across countries and the variation in financial vulnerability across sectors. About 20%–25% of the impact of credit constraints on trade is driven by reductions in total output. Of the additional, trade-specific effect, one-third reflects limited firm entry into exporting, while two-thirds are due to contractions in exporters' sales. Financially developed economies export more in financially vulnerable sectors because they enter more markets, ship more products to each destination, and sell more of each product. These results have important policy implications for less developed nations that rely on exports for economic growth but suffer from weak financial institutions.

Keywords: Credit constraints; Financial development; Heterogeneous firms; International trade; Product variety; Trade partners; F10; F14; F36; G20; G28; G32

Journal Article.  16775 words.  Illustrated.

Subjects: International Trade ; Financial Regulation ; Financial Institutions and Services ; Corporate Governance ; International Finance

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