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

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  • Maria Bas
  • Antoine Berthou

Abstract

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. Copyright 2012, Oxford University Press.

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Bibliographic Info

Article provided by World Bank Group in its journal The World Bank Economic Review.

Volume (Year): 26 (2012)
Issue (Month): 3 ()
Pages: 486-513

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Handle: RePEc:oup:wbecrv:v:26:y:2012:i:3:p:486-513

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References

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  1. Mirabelle Muûls & Mauro Pisu, 2007. "Imports and Exports at the Level of the Firm : Evidence from Belgium," Working Paper Research 114, National Bank of Belgium.
  2. Rivera-Batiz, Luis A. & Romer, Paul M., 1991. "International trade with endogenous technological change," European Economic Review, Elsevier, vol. 35(4), pages 971-1001, May.
  3. Kasahara, Hiroyuki & Rodrigue, Joel, 2008. "Does the use of imported intermediates increase productivity? Plant-level evidence," Journal of Development Economics, Elsevier, vol. 87(1), pages 106-118, August.
  4. Markusen, James R, 1989. "Trade in Producer Services and in Other Specialized Intermediate Inputs," American Economic Review, American Economic Association, vol. 79(1), pages 85-95, March.
  5. Ann E. Harrison & Margaret S. McMillan, 2001. "Does Direct Foreign Investment Affect Domestic Firms' Credit Constraints?," NBER Working Papers 8438, National Bureau of Economic Research, Inc.
  6. Schor, Adriana, 2004. "Heterogeneous productivity response to tariff reduction. Evidence from Brazilian manufacturing firms," Journal of Development Economics, Elsevier, vol. 75(2), pages 373-396, December.
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Citations

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Cited by:
  1. Nakhoda, Aadil, 2012. "The influence of financial leverage of firms on their international trading activities," MPRA Paper 35765, University Library of Munich, Germany.
  2. Joachim Wagner, 2014. "Credit constraints and margins of import: First evidence for German manufacturing enterprises," Working Paper Series in Economics 294, University of Lüneburg, Institute of Economics.
  3. Joachim Wagner, 2014. "Credit constraints and exports: evidence for German manufacturing enterprises," Applied Economics, Taylor & Francis Journals, vol. 46(3), pages 294-302, January.
  4. Maria Bas & Antoine Berthou, 2013. "Does Input-Trade Liberalization Affect Firms' Foreign Technology Choice?," Working Papers 2013-11, CEPII research center.
  5. Maria Bas, 2013. "Does Services Liberalization Affect Manufacturing Firms' Export Performance? Evidence from India," Working Papers 2013-17, CEPII research center.
  6. Maria Bas, 2012. "Foreign ownership wage premium: Does financial health matter?," Working Papers 2012-24, CEPII research center.
  7. Wagner, Joachim, 2013. "Credit constraints and exports: A survey of empirical studies using firm level data," Working Paper Series in Economics and Institutions of Innovation 334, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  8. Maria Bas & Antoine Berthou, 2012. "The Unequal Effects of Financial Development on Firms' Growth in India," Working Papers 2012-22, CEPII research center.
  9. Ghosh, Saibal, 2013. "Do economic reforms matter for manufacturing productivity? Evidence from the Indian experience," Economic Modelling, Elsevier, vol. 31(C), pages 723-733.
  10. McCann, Fergal, 2011. "Access to credit amongst SMEs: Pre and post-crisis evidence from Eastern Europe," Economic Letters 03/EL/11, Central Bank of Ireland.

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