Credit Constraints, Bank Incentives, And Firm Export: Evidence From India

The aim of this paper is to investigate the impact of firms’ financial fragility and banks incentives on firms’ decision to exit the export market. We draw information from the Prowess database on a large sample of Indian businesses between 2002 and 2017 and we obtain bank data from the Reserve Bank of India. Estimation results indicate that more indebted firms are associated with a high probability of exiting the export market. However, when we focus only on bank borrowing, we find that firms with high levels of bank debt (over total assets) are characterized by a lower probability of abandoning the export sector. By interacting our measures of financial fragility with a state-owned bank dummy, we also show that highly indebted firms borrowing from state-owned banks are associated with an even lower probability of exiting the export market. Finally, when we employ the change in the priority sector regulation to test the causality of our results and avoid endogeneity concerns, we provide evidence that firms borrowing from banks that were missing their priority sector targets are characterized by a significantly lower probability of abandoning foreign markets.The study did not find any significant effect of policy change on firms trying to enter the export market. Using an indirect definition of productivity showed that the policy change did not affect the productivity of the leveraged firms.