A Push over Trade Barriers: Firms’ Access to External Finance and Their Sales Hierarchy

This article analyzes the effects of external finance on firms’ decision to choose a firm type with different sales combinations, in the presence of both domestic and international trade costs. It utilizes a World Bank survey of firms operating in China in the early 2000s with a multinomial logit method to inform the study. Based on firms’ sales destinations, we categorize firms in four exclusive types as Provincial Firms, Domestic Firms, Pure Exporters, and All Sellers to highlight domestic trade barriers across provincial borders and international trade barriers. We find that access to financial loans significantly raises firms’ odds to overcome domestic and international trade barriers by choosing a firm type with sales beyond their home provincial borders and/or overseas. The effects vary across firm ownership types of being SOEs, foreign affiliates and private firms, highlighting their inherent differences. The results indicate loans’ perceived importance, reflecting the inefficient loan allocations in China. Further, the results here help uncover the pervasiveness of China’s domestic trade barriers: access to external finance significantly increases the odds for firms to sell outside their home provinces even if they did not feel local protection and more for those if they did.