Financing constraints and exports: evidence from India
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Financing constraints and exports: evidence from India M. Padmaja 1
& Subash
Sasidharan 2
Accepted: 5 October 2020/ # Academy of Economics and Finance 2020
Abstract This paper investigates the effect of financing constraints on the extensive and intensive margins of exports using a rich firm-level data on Indian manufacturing firms. Following the literature, we adopt liquidity ratio and leverage ratio as the measures of financing constraints and control for other firm-level factors. Controlling for initial conditions, endogeneity, and selection bias, we find that financing constraints have a significant impact on the extensive margin of exports. Using Propensity Score Matching –Differences in Differences approach, we find significant post-entry effects of exports on firm financial performance. Keywords Financing constraints . Exports . Firm heterogeneity JEL classifications F10 . G11 . F14 . D21 . F36
1 Introduction Why do some firms export while others from the same industry do not? The answer to this intriguing question was provided by the heterogeneous firm models pioneered by Melitz (2003), which highlights the role of productivity
The authors would like to thank Dr. Mayuri Dilip for the editorial assistance. We would also like to thank two anonymous referees for the helpful comments and suggestions.
* M. Padmaja [email protected] Subash Sasidharan [email protected]
1
Department of Humanities and Social Sciences, National Institute of Technology, Tiruchirappalli, Tamil Nadu, India
2
Department of Humanities and Social Sciences, Indian Institute of Technology, Madras, Tamil Nadu, India
Journal of Economics and Finance
in exporting. Curiously, certain studies report some non-exporters are more productive than the exporters (Eaton et al. 2004). This puzzle posed by the subsequent studies of firm heterogeneity made trade theorists probe beyond the firm heterogeneity in terms of productivity. More recently, studies have extended the Melitz (2003) model of firm heterogeneity in terms of financing constraints and the notable extensions of the theoretical framework include Chaney (2005), Muuls (2008), and Manova (2013). These set of trade models with heterogeneous firms posit that liquidity constrained firms are less likely to export since they are unable to cover the fixed costs associated with exporting. In the context of export decision, the role of financing constraints assumes greater significance due to the growing importance of financial markets in international trade (Beck and Levine 2002), existence of sunk costs in export market entry, and the delay in the sale and receipts from the international transactions. If the financing constraints prevent firms from paying the marginal costs of trade, access to finance may also influence the intensive margin of exports1 (Berman and Hericourt 2010). Even though the theoretical literature on the role of financing factors in exports is fairly well established, micro evidence is relatively scant especially in the context of developing economies (Ngo 2015; Bel
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