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Payment Choice in International Trade: Theory and Evidence from Cross-country Firm Level Data

Author

Listed:
  • Andreas Hoefele

    (School of Business and Economics, Loughborough University, UK)

  • Tim Schmidt-Eisenlohr

    (University of Illinois, Urbana-Champaign, USA)

  • Zihong Yu

    (Nottingham University School of Economics, UK)

Abstract

When trading across borders, firms choose between di erent payment contracts. Theoretically, this should allow firms to trade-off differences in financing costs and enforcement across countries. This paper provides evidence for this hypothesis from a large number of countries. As predicted, the use of Open Account decreases in financing costs and contract enforcement in the source country. We extend the theory and show that the more complex an industry is, the more important is contract enforcement and the less important are financing costs for the contract choice. We also find evidence that suggests that international enforcement problems can explain trade intermediation.

Suggested Citation

  • Andreas Hoefele & Tim Schmidt-Eisenlohr & Zihong Yu, 2013. "Payment Choice in International Trade: Theory and Evidence from Cross-country Firm Level Data," Discussion Paper Series 2013_11, Department of Economics, Loughborough University, revised Oct 2013.
    • Handle: RePEc:lbo:lbowps:2013_11
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    References listed on IDEAS

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    Cited by:

    1. Banu Demir & Tomasz K. Michalski & Evren Ors, 2017. "Risk-Based Capital Requirements for Banks and International Trade," Review of Financial Studies, Society for Financial Studies, vol. 30(11), pages 3970-4002.
    2. Katharina Eck & Martina Engemann & Monika Schnitzer, 2015. "How trade credits foster exporting," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 151(1), pages 73-101, February.
    3. Manova, Kalina & Yu, Zhihong, 2016. "How firms export: Processing vs. ordinary trade with financial frictions," Journal of International Economics, Elsevier, vol. 100(C), pages 120-137.
    4. Kemal Turkcan, 2016. "Evolving Patterns of Payment Methods in Turkish Foreign Trade," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 2(1), pages 3-29, June.
    5. Fabrice Defever & Alejandro Riano & Gonzalo Varela, 2020. "Evaluating the impact of export finance support on firm-level export performance: Evidence from Pakistan," Discussion Papers 2020-07, University of Nottingham, GEP.
    6. Niepmann, Friederike & Schmidt-Eisenlohr, Tim, 2017. "International trade, risk and the role of banks," Journal of International Economics, Elsevier, vol. 107(C), pages 111-126.
    7. C. Fritz Foley & Kalina Manova, 2015. "International Trade, Multinational Activity, and Corporate Finance," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 119-146, August.
    8. Caballero, Julian & Candelaria, Christopher & Hale, Galina, 2018. "Bank linkages and international trade," Journal of International Economics, Elsevier, vol. 115(C), pages 30-47.
    9. Veysel Avsar, 2020. "Travel Visas and Trade Finance," Economics Bulletin, AccessEcon, vol. 40(1), pages 567-573.
    10. Niepmann, Friederike & Schmidt-Eisenlohr, Tim, 2017. "No guarantees, no trade: How banks affect export patterns," Journal of International Economics, Elsevier, vol. 108(C), pages 338-350.
    11. Alvaro Garcia-Marin & Santiago Justel & Tim Schmidt-Eisenlohr, 2019. "Trade Credit, Markups, and Relationships," CESifo Working Paper Series 7600, CESifo.
    12. Chan, Jackie M.L., 2019. "Financial frictions and trade intermediation: Theory and evidence," European Economic Review, Elsevier, vol. 119(C), pages 567-593.
    13. Kemal Türkcan & Veysel Avsar, 2016. "Investigating the Role of Contract Enforcement and Financial Costs on the Payment Choice: Industry-Level Evidence from Turkey," Global Economy Journal (GEJ), World Scientific Publishing Co. Pte. Ltd., vol. 16(1), pages 135-160, March.
    14. Lee, Chien-Chiang & Wang, Chih-Wei & Ho, Shan-Ju, 2020. "Financial inclusion, financial innovation, and firms’ sales growth," International Review of Economics & Finance, Elsevier, vol. 66(C), pages 189-205.
    15. Alvaro Garcia-Marin & Santiago Justel & Tim Schmidt-Eisenlohr, 2019. "Trade Credit and Markups," 2019 Meeting Papers 254, Society for Economic Dynamics.
    16. Nikita Lopatin, 2020. "Trade Agreements, Uncertainty and Capital Structure of Exporters," International Journal of Economics and Financial Issues, Econjournals, vol. 10(1), pages 235-243.
    17. Castellares, Renzo & Salas, Jorge, 2019. "Contractual imperfections and the impact of crises on trade: Evidence from industry-level data," Journal of International Economics, Elsevier, vol. 116(C), pages 33-49.
    18. Demir, Banu & Javorcik, Beata, 2014. "Grin and Bear It: Producer-financed Exports from an Emerging Market," CEPR Discussion Papers 10142, C.E.P.R. Discussion Papers.
    19. Demir, Banu & Javorcik, Beata, 2018. "Don’t throw in the towel, throw in trade credit!," Journal of International Economics, Elsevier, vol. 111(C), pages 177-189.
    20. Doan, Ngoc Thang & Vu, Thi Kim Chi & Nguyen, Thi Cam Thuy & Nguyen, Thi Hong Hai & Nguyen, Kieu Trang, 2020. "Cash-in-advance, export decision and financial constraints: Evidence from cross-country firm-level data," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 75-92.
    21. Defever, F. & Riaño, A. & Varela, G., 2020. "Evaluating the Impact of Export Finance Support On Firm-level Export Performance: Evidence from Pakistan," Working Papers 20/14, Department of Economics, City University London.
    22. Castellares, Renzo & Salas, Jorge, 2019. "Contractual imperfections and the impact of crises on trade: Evidence from industry-level data," Journal of International Economics, Elsevier, vol. 116(C), pages 33-49.
    23. Jackie M.L. Chan, 2015. "Trade Intermediation, Financial Frictions, and the Gains from Trade," Discussion Papers 15-009, Stanford Institute for Economic Policy Research.

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    More about this item

    Keywords

    trade finance; payment contracts; industry complexity; developing countries; trade intermediation;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F3 - International Economics - - International Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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