Most countries in Latin America (and around the world) have a State bank or other public institution whose main mission is to grant credit to finance productive investments and, in particular, to support international trade transactions by offering better terms, rates and access than those available in the credit market. But is there really a problem in firms’ access to credit -- in particular, exporters -- that justifies state aid? How can we quantify the constraints on credit access faced by exporters? How important is improving credit access on aggregate exports and the overall economy? In this article, I summarize the results of my research and related academic literature that address these questions.

Credit constraints and performance of exporting firms

Exporters depend more on credit than firms whose sales are directed mainly to the domestic market. On the one hand, exporters face higher working capital financing needs since there is a greater lag between the time when the good is produced and when the payment for its foreign sale is received. On the other hand, they also face greater difficulties to recover payments owed in case of a default by importers, hindering their access to credit. [1] Several empirical studies have, thus, used data from surveys or industrial censuses to establish a causal relationship between access to credit by exporting firms and export performance (for example, amount of exports, export intensity, survival in the export market, etc.) However, when trying to establish a causal relationship, an identification problem arises: if we observe a firm with little credit, is it due to limited demand for credit or due to a shortage in the availability of credit?

A relatively simple way to investigate whether firms are subject to credit constraints is asking to firm executives. In surveys carried out by the World Bank (World Bank Enterprise Surveys), firms’ managers respond, among other questions, if they face difficulties either in the access or in the cost of financing. In Table 1, we present results for different countries in Latin America. As the table shows, access to financing is, on average, a relevant obstacle for firms in the region, even among large and exporting firms.

Given these surveys focus on subjective responses with limited comparability across firms, an alternative way of distinguishing the impact of credit frictions is through statistical and econometric methods. Thus, previous papers have sought to establish a causal relationship between the availability of credit and the performance of exporters using data from firms and banks: these studies contrast how exports of firms with access to different banks, with different financial conditions but similar along other dimensions, respond differently to a financial shock (i.e. a sudden decrease in liquidity). In this way, Amiti and Weinstein (2011) and Paravisini et al. (2014) investigate the response of exports to financial shocks. Chor and Manova (2012) follow a similar strategy to show that financial factors played a predominant role in the collapse of world trade during the global financial crisis of 2008-2009.

A third approach is to use an economic model to simulate the behavior of financially-constrained firms and contrast the simulated firm dynamics with the dynamics observed in the data. If the dynamics implied by the model are similar to the data, we would conclude that the performance of exporters observed in the data is consistent with the existence of financial frictions. We follow this approach in Kohn, Leibovici and Szkup (2016) and show that firms subject to credit constraints face a lower probability of survival in the export market and increase their exports only gradually, consistently with the data. To distinguish the role of financial frictions from alternative explanations (for example, learning costs, market penetration, etc.), we show that firms subject to credit constraints reduce their domestic sales when they start to export and we also investigate the dynamics of their financial expenditures. These variables behave as in the data, but they are not consistent with alternative mechanisms that may drive new exporter dynamics. [3]

Financial frictions, financial development and aggregate exports

A question that arises from these studies is whether it is indeed desirable to improve exporters’ access to credit. Thus, we now discuss the aggregate effects of financial development on aggregate exports and the overall economy.

At the macro level, the literature has followed both empirical and structural strategies to study the aggregate effects of financial frictions. For example, Beck (2003) and Manova (2013) show that greater financial development increases exports in industries that, due to technological characteristics, are more dependent on external financing. Leibovici (2016) builds a model consistent with this evidence and shows that general equilibrium effects on wages, prices and interest rates end up hurting sectors less intensive in external financing, attenuating the aggregate effects of financial development.

In Kohn, Leibovici and Szkup (2017a), we study how credit constraints shape the response of aggregate exports in episodes of large devaluations. In our model, as in the data, firms have debt denominated in foreign currency. When the devaluation hits, debt becomes more expensive in domestic currency, increasing the value of firms' liabilities relative to their assets, decreasing the collateral value of these firms and their access to credit (``balance-sheet effects’’). Does this effect contribute to slow down aggregate exports growth in these episodes? We show, analytically and in a quantitative experiment, that this depends crucially on the distribution of firms' export intensity: the change in aggregate exports is decreasing in the share of firms with high export intensity. The intuition behind this result is that firms that export a low share of their total sales can increase their exports by reallocating resources and sales previously directed to the domestic market, even though they cannot increase their productive capacity due to financial constraints. We show that this mechanism is consistent with firms’ export dynamics in the Mexican devaluation in 1995.

Conclusion

In this article, we briefly discuss how credit constraints affect exporters, aggregate exports and the overall economy in response to different economic policies such as a devaluation or a financial liberalization. [4] While our results suggest that financial frictions indeed drive firms’ export dynamics, aggregate effects are mitigated by the reallocation of resources between sectors and between markets in response to price changes.

1. See Amity and Weinstein (2011).

2. Access to credit includes availability and cost (interest rates, fees and collateral requirements).

3. Data from manufacturing firms, Annual National Industrial Survey (ENIA), Chile. These dynamics are robust across countries (see Ruhl and Willis, 2017).

4. Currently, in Kohn, Leibovici and Szkup (2017b), we are investigating if the degree of financial development affects the response of exports to trade liberalization.
 

References:

Amiti, M., & Weinstein, D. E. (2011). Exports and financial shocks. The Quarterly Journal of Economics, 126(4), 1841-1877.

Beck, T. (2003). Financial dependence and international trade. Review of International Economics, 11, 296–316.

Chor, D., & Manova, K. (2012). Off the cliff and back? Credit conditions and international trade during the global financial crisis. Journal of International Economics, 87(1), 117-133.

Kohn, D., Leibovici, F., & Szkup, M. (2016). Financial frictions and new exporter dynamics. International Economic Review, 57(2), 453-486.

Kohn, D., Leibovici, F., & Szkup, M. (2017a). Financial frictions and export dynamics in large devaluations. Working paper.

Kohn, D., Leibovici, F., & Szkup, M. (2017b). Financial frictions, trade, and misallocation. Working paper.

Leibovici, F. (2016). Financial development and international trade. Working Paper.

Minetti, R. and Zhu, S. C. (2011). Credit constraints and firm export: Microeconomic evidence from Italy. Journal of International Economics, 83, 109–125.

Muuls M, (2015). Exporters, importers and credit constraints. Journal of International Economics, 95, 333-343.

Paravisini, D., Rappoport, V., Schnabl, P., & Wolfenzon, D. (2014). Dissecting the effect of credit supply on trade: Evidence from matched credit-export data. The Review of Economic Studies, 82(1), 333-359.

Ruhl, K. J., & Willis, J. L. (2017). New exporter dynamics. International Economic Review, 58(3), 703-726.