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Trade liberalization and credit constraints: Why opening up may fail to promote convergence

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  • Katrin Peters
  • Monika Schnitzer

Abstract

This paper examines credit constraints as one channel held responsible for hampering economic convergence between countries. Specifically, we extend a Melitz and Ottaviano (2008) type trade model with variable mark-ups to allow for endogenous technology adoption. We consider a framework with two countries that potentially differ with respect to credit market development. Firms have the option to adopt a more efficient technology by paying some fixed cost that is more costly to finance for financially constrained firms. We find that technology adoption increases in both countries after trade liberalization but more so in the financially more developed country: the productivity gap widens. Simulations show that the welfare gap widens too. Opening up without sufficient access to external funding thus fails to promote convergence.

Suggested Citation

  • Katrin Peters & Monika Schnitzer, 2015. "Trade liberalization and credit constraints: Why opening up may fail to promote convergence," Canadian Journal of Economics, Canadian Economics Association, vol. 48(3), pages 1099-1119, August.
    • Handle: RePEc:cje:issued:v:48:y:2015:i:3:p:1099-1119
    DOI: 10.1111/caje.12169
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    Cited by:

    1. Sugata Marjit & Suryaprakash Mishra, 2023. "Credit market imperfection, lack of entrepreneurship and capital outflow from a developing economy," Review of Development Economics, Wiley Blackwell, vol. 27(3), pages 1855-1873, August.
    2. Carlo Altomonte & Domenico Favoino & Monica Morlacco & Tommaso Sonno, 2021. "Markups, intangible capital and heterogeneous financial frictions," CEP Discussion Papers dp1740, Centre for Economic Performance, LSE.
    3. Sugata Marjit & Suryaprakash Mishra, 2020. "Credit Market Imperfection, Lack of Entrepreneurs and Capital Outflow from a Developing Economy," CESifo Working Paper Series 8515, CESifo.
    4. Carsten Eckel & Florian Unger, 2023. "Credit Constraints, Endogenous Innovations, And Price Setting In International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(4), pages 1715-1747, November.
    5. Imen Mohamed Sghaier, 2020. "Does Financial Development Affect the Economic Growth Gains from Trade Openness?," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 4, pages 666-682, December.
    6. Carlo Altomonte & Domenico Favoino & Tommaso Sonno, 2017. "Markups, Productivity and the Financial Capability of Firms," BAFFI CAREFIN Working Papers 1755, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    7. Peter Egger & Sebastian Kunert & Tobias Seidel, 2018. "The Competitive Effects of Credit Constraints in the Global Economy," Economica, London School of Economics and Political Science, vol. 85(340), pages 771-792, October.
    8. Eapen, Alex & Yeo, Jihye & Sasidharan, Subash, 2019. "Finance constraints and technology spillovers from foreign to domestic firms," Economic Modelling, Elsevier, vol. 76(C), pages 50-62.
    9. Irlacher, Michael & Unger, Florian, 2018. "Capital market imperfections and trade liberalization in general equilibrium," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 402-423.
    10. Chen, Meng-Wei & Lu, Cuicui & Tian, Yuan, 2021. "Export price and quality adjustment: The role of financial stress and exchange rate," Economic Modelling, Elsevier, vol. 96(C), pages 336-345.
    11. Reto Foellmi & Manuel Oechslin, 2020. "Harmful Procompetitive Effects of Trade in Presence of Credit Market Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(6), pages 1493-1525, September.
    12. Carlo Altomonte & Domenico Favoino & Tommaso Sonno, 2018. "Markups and Productivity under Heterogeneous Financial Frictions," BAFFI CAREFIN Working Papers 18100, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    13. Duc Bao Nguyen & Anne‐Gaël Vaubourg, 2021. "Financial intermediation, trade agreements and international trade," The World Economy, Wiley Blackwell, vol. 44(3), pages 788-817, March.
    14. Sugata Marjit & Noritsugu Nakanishi, 2023. "The wage fund theory and gains from trade in a dynamic Ricardian model," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(4), pages 879-897, December.
    15. Reto Foellmi & Stefan Legge & Alexa Tiemann, 2021. "Innovation and trade in the presence of credit constraints," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(3), pages 1168-1205, November.

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    JEL classification:

    • F1 - International Economics - - Trade

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