Firms and Credit Constraints along the Global Value Chain: Processing Trade in China
AbstractGlobal supply chains allow firms in developing countries to share in the gains from trade by conducting either ordinary or processing trade. This paper examines how financial constraints affect companies’ choice of trade regime and ultimately profitability. We exploit matched customs and balance sheet data from China, where processing trade is further divided into import-and-assembly (processing firm pays for imported inputs) and pure assembly (processing firm receives imported inputs for free). We establish two main results. First, profits, profitability and value added fall as exporters orient sales from ordinary towards processing trade, and from import-and-assembly towards pure assembly. Second, less financially constrained firms perform more ordinary trade relative to processing trade, and more import-and-assembly relative to pure assembly. We rationalize these patterns with a model that incorporates credit constraints and imperfect contractibility in companies’ choice of trade regime. Our results imply that limited access to capital restricts firms to low value-added stages of the supply chain and precludes them from pursuing more profitable opportunities. Financial frictions thus affect the organization of production across firm and country boundaries, and inform optimal trade policy in the presence of trade in intermediates.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18561.
Date of creation: Nov 2012
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Find related papers by JEL classification:
- F10 - International Economics - - Trade - - - General
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- F14 - International Economics - - Trade - - - Empirical Studies of Trade
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-06 (All new papers)
- NEP-CNA-2012-12-06 (China)
- NEP-DEV-2012-12-06 (Development)
- NEP-INT-2012-12-06 (International Trade)
- NEP-TRA-2012-12-06 (Transition Economics)
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- Fabrice Defever & Alejandro Riaño, 2012.
"China's Pure Exporter Subsidies,"
CESifo Working Paper Series
4054, CESifo Group Munich.
- Fabrice Defever & Alejandro Riaño, 2013. "China's Pure Exporter Subsidies," FIW Working Paper series 121, FIW.
- Fabrice Defever & Alejandro Riaño, . "China's Pure Exporter Subsidies," Discussion Papers 12/11, University of Nottingham, GEP.
- Fabrice Defever & Alejandro Riaño, 2012. "China's Pure Exporter Subsidies," CEP Discussion Papers dp1182, Centre for Economic Performance, LSE.
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