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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
    as

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    References listed on IDEAS

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    1. JaeBin Ahn, 2011. "A Theory of Domestic and International Trade Finance," IMF Working Papers 11/262, International Monetary Fund.
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    6. Ellingsen, Tore & Vlachos, Jonas, 2009. "Trade finance in a liquidity crisis," Policy Research Working Paper Series 5136, The World Bank.
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    Citations

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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. 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.
    3. Caballero, Julian & Candelaria, Christopher & Hale, Galina, 2018. "Bank linkages and international trade," Journal of International Economics, Elsevier, vol. 115(C), pages 30-47.
    4. 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.
    5. Chan, Jackie M.L., 2019. "Financial frictions and trade intermediation: Theory and evidence," European Economic Review, Elsevier, vol. 119(C), pages 567-593.
    6. Türkcan Kemal & Avsar Veysel, 2016. "Investigating the Role of Contract Enforcement and Financial Costs on the Payment Choice: Industry-Level Evidence from Turkey," Global Economy Journal, De Gruyter, vol. 16(1), pages 135-160, March.
    7. 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.
    8. 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.
    9. Alvaro Garcia-Marin & Santiago Justel & Tim Schmidt-Eisenlohr, 2019. "Trade credit and markups," CESifo Working Paper Series 7600, CESifo Group Munich.
    10. 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.
    11. 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.
    12. Jackie M.L. Chan, 2015. "Trade Intermediation, Financial Frictions, and the Gains from Trade," Discussion Papers 15-009, Stanford Institute for Economic Policy Research.
    13. 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.

    More about this item

    Keywords

    trade finance; payment contracts; industry complexity; developing countries; trade intermediation;

    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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