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Credit Constraints, Heterogeneous Firms, and International Trade

  • Kalina Manova

This paper examines the detrimental consequences of financial market imperfections for international trade. I develop a heterogeneous-firm model with countries at different levels of financial development and sectors of varying financial vulnerability. Applying this model to aggregate trade data, I study the mechanisms through which credit constraints operate. First, financial development increases countries' exports above and beyond its impact on overall production. Firm selection into exporting accounts for a third of the trade-specific effect, while two thirds are due to reductions in firm-level exports. Second, financially advanced economies export a wider range of products and their exports experience less product turnover. Finally, while all countries service large destinations, exporters with superior financial institutions have more trading partners and also enter smaller markets. All of these effects are magnified in financially vulnerable sectors. These results have important policy implications for less developed economies that rely on exports for economic growth but suffer from poor financial contractibility.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14531.

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Date of creation: Dec 2008
Date of revision:
Publication status: published as Credit Constraints, Heterogeneous Firms, and International Trade Review of Economic Studies 80 (2013), p.711-744. Updated version of NBER Working Paper 14531.
Handle: RePEc:nbr:nberwo:14531
Note: ITI
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