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Financial frictions and trade intermediation: Theory and evidence

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  • Chan, Jackie M.L.

Abstract

This paper examines the impact of financial frictions on exports through trade intermediaries theoretically and empirically. I present a heterogeneous firm model of trade intermediation and financial frictions, in which firms require external finance for their trade costs. Since exporting through intermediaries entails lower fixed costs but higher variable costs, firms facing greater financial frictions are more likely to pursue intermediated trade. The model finds strong empirical support in rich data for indirect versus direct exporting at both the micro and macro levels. Micro-level data for over 9,000 firms in 115 countries reveals that financially more constrained firms are more likely to use trade intermediaries in exporting. Correspondingly, macro-level data of entrepôt trade through Hong Kong for 56 exporting countries shows that financially less developed countries are more likely to rely on trade intermediation. Both of these effects are stronger in financially more vulnerable industries and are not driven by other firm- and country-level determinants of exporting. These results have policy implications for the role of trade intermediaries in compensating for capital market frictions, in particular, as a means to enhance the gains from trade.

Suggested Citation

  • Chan, Jackie M.L., 2019. "Financial frictions and trade intermediation: Theory and evidence," European Economic Review, Elsevier, vol. 119(C), pages 567-593.
  • Handle: RePEc:eee:eecrev:v:119:y:2019:i:c:p:567-593
    DOI: 10.1016/j.euroecorev.2018.04.002
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    2. Francesco Nucci & Filomena Pietrovito & Alberto Franco Pozzolo, 2021. "Intermediated Trade and Credit Constraints: The Case of Firm's Imports," Development Working Papers 471, Centro Studi Luca d'Agliano, University of Milano.
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    4. Chen, Yi-Fan & Peng, Shin-Kun & Tsai, Tsung-Sheng, 2021. "The market structures in trade intermediation with heterogeneous manufacturing firms," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 501-523.
    5. David Kohn & Fernando Leibovici & Michal Szkup, 2021. "Financial Frictions and International Trade," Working Papers 2021-009, Federal Reserve Bank of St. Louis.

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    More about this item

    Keywords

    Trade intermediaries; Indirect exports; Financial frictions; Credit constraints; Hong Kong;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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