Export survival and foreign financing

Summary

Focus

Foreign financing provides external finance and better financing conditions to exporters in the developing world. Through this channel, it increases their export survival rates and could therefore foster economic development.

Contribution

Export survival rates are smaller in developing countries than in advanced economies, and this explains a large part of the long-term export growth differential between them. However, very little has been said about whether foreign financing can increase export survival, through the provision of external finance and better financing conditions.

We address this issue for a developing country, Argentina, by using a unique firm-level dataset that contains rich information on the domestic and foreign financing of exporting firms. We show that exporters tend to borrow in countries in which interest rates were smaller than in Argentina, suggesting that monetary and liquidity conditions were easier in these economies. Then, we employ standard empirical techniques used in the survival literature, specifically the probit random effects and the clog-log setups, to test whether foreign financing increases export survival. Finally, we run robustness check analysis with an Instrumental Variable empirical setup.

Findings

First, using the standard techniques in the survival literature, we find that even after controlling for firm-level characteristics, such as domestic financing and size, the amount of foreign financing obtained by an exporter improves its export survival prospects.

Second, instrumenting for the foreign financing of Argentine firms with the money market interest rates of the foreign countries in which they borrowed, we provide further support for this result.

Mapping these outcomes onto other findings in the literature, we interpret these results as evidence that foreign financing makes it possible to cover and reduce exporting costs that are faced recurrently, multiple times, once a firm has already entered the export market. A theoretical model we develop is consistent with this interpretation of the results.

Abstract

Exporting is a finance-intensive activity. But credit markets are frequently underdeveloped and domestic financing tends to be scarce in developing countries, for which a strong export sector is crucial for economic development. Thus, this paper investigates whether foreign financing provides better financing conditions than domestic financing and/or otherwise unavailable external finance, thus increasing export survival rates in a developing country. To that end, it assembles a unique dataset, rarely available for other countries, containing information on foreign credit obtained by Argentine exporters. Based on the empirical models conventionally used in the export survival literature - specifically the probit random effects and the clog-log setups - we provide evidence of a positive link between foreign financing and export survival. This finding is confirmed using an instrumental variable approach.

JEL classification: F10, F13, G20, G28

Keywords: international trade, credit, foreign financing, export survival