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Financing constraints, firm dynamics, export decisions, and aggregate productivity

  • Andrea Caggese
  • Vicente Cuñat

We develop a dynamic industry model where financing frictions affect the entry decisions of new firms in the home market, as well as the riskiness of operating firms. These two factors in turn determine a joint endogenous distribution of firms across productivity, volatility and financial wealth. We show that this endogenous distribution is crucial to understand export and productivity dynamics after a trade liberalization. In particular, the calibrated model predicts that financing frictions have an ambiguous effect on the number of firms starting to export. They reduce the ability of firms to finance the fixed costs necessary to start exporting, but they also change the distribution of domestic firms so that most of them find more profitable to access foreign markets. More importantly, the model predicts that financing constraints, even when they have a negligible net effect on the number of exporting firms, reduce the aggregate productivity gains induced by trade liberalization by 30% to 50%, because they distort the selection into export of the most productive firms. In the second part of the paper we verify the main predictions of the model with a rich dataset of Italian manufacturing firms for the period 1995-2003.

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File URL: http://eprints.lse.ac.uk/43160/
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 43160.

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Length: 54 pages
Date of creation: 13 Jun 2011
Date of revision:
Handle: RePEc:ehl:lserod:43160
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