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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 a sample of about 5,500 Indian manufacturing firms per year, having reported information on financial statements and imports by type of good over the period 1996-2006. Our empirical findings shed new light on the micro determinants of firms’ choice 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, an improvement of the liquidity or leverage ratio by 10% increases the probability of importing capital goods by 3% to 5% respectively, independently of productivity. These findings are robust to alternative measures of foreign technology. The effect of leverage is also robust with respect to specifications dealing directly with reverse causality.

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Bibliographic Info

Paper provided by CEPII research center in its series Working Papers with number 2011-06.

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Date of creation: Mar 2011
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Handle: RePEc:cii:cepidt:2011-06

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Keywords: Access to finance; foreign technology; firm panel data; INDIA; INVESTMENT;

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References

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  1. 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.
  2. Mirabelle Mu�ls & Mauro Pisu, 2009. "Imports and Exports at the Level of the Firm: Evidence from Belgium," The World Economy, Wiley Blackwell, vol. 32(5), pages 692-734, 05.
  3. Hiroyuki Kasahara & Joel Rodrigue, 2005. "Does the Use of Imported Intermediates Increase Productivity? Plant-Level Evidence," University of Western Ontario, Economic Policy Research Institute Working Papers 20057, University of Western Ontario, Economic Policy Research Institute.
  4. 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.
  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. Luis A. Rivera-Batiz & Paul M. Romer, 1992. "International Trade with Endogenous Technological Change," NBER Working Papers 3594, National Bureau of Economic Research, Inc.
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Cited by:
  1. 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.
  2. Maria Bas & Antoine Berthou, 2012. "The Unequal Effects of Financial Development on Firms' Growth in India," Working Papers 2012-22, CEPII research center.
  3. Nakhoda, Aadil, 2012. "The influence of financial leverage of firms on their international trading activities," MPRA Paper 35765, University Library of Munich, Germany.
  4. Joachim Wagner, 2012. "Credit constraints and exports: Evidence for German manufacturing enterprises," Working Paper Series in Economics 251, University of Lüneburg, Institute of Economics.

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