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Investment Liberalization, Credit Constraints, And International Trade

Author

Listed:
  • TINGTING XIONG

    (Department of Economics, Howard University, 2400 6th Street NW ASB-B Room 314, Washington, DC 20059, USA)

  • HAO SUN

    (#x2020;Department of Government and Public Affairs, School of Civic Leadership, Business and Social Change, Gallaudet University, USA)

Abstract

This paper investigates the effect of bilateral investment treaties (BITs) on the extensive and intensive product margins of exports in sectors with different credit constraints. The model in this paper demonstrates that such investment liberalization increases the extensive product margin by lowering the variable costs of selling abroad, while it decreases the intensive product margin by lowering both the fixed investment costs and the variable costs. Moreover, the effects of investment liberalization are stronger in financially more vulnerable sectors. Using a detailed dataset of 190 countries and 27 manufacturing sectors from 1988 to 2006, this paper furnishes robust evidence that BITs increase the extensive margin of exports from developed countries and decrease the intensive margin of exports. It further shows that BITs decrease the intensive margin of exports from developed countries more in the sectors that are more dependent on external finance. Similarly, the intensive margin of exports from developed countries in low tangibility sectors falls by 11.81% because of BITs, while the intensive margin in high tangibility sectors is quite stable with BITs.

Suggested Citation

  • Tingting Xiong & Hao Sun, 2021. "Investment Liberalization, Credit Constraints, And International Trade," Global Economy Journal (GEJ), World Scientific Publishing Co. Pte. Ltd., vol. 21(01), pages 1-46, March.
    • Handle: RePEc:wsi:gejxxx:v:21:y:2021:i:01:n:s2194565921500044
    DOI: 10.1142/S2194565921500044
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