Financial Health and the Intensive Margin of Trade
One sentence summary: Finance facilitates trade for big-sized and productive firms in emerging markets.
The corresponding paper by Deniz Baglan and Hakan Yilmazkuday has been accepted for publication at Emerging Markets Finance and Trade.
Abstract
Using data on 2380 firms from nine emerging countries, this
paper shows that there is a positive and significant relationship between
financial health and the intensive margin of trade. The magnitude of this
positive relationship is shown to depend on several firm characteristics, where
the effects of financial health on firm-level exports are larger for firms with
higher levels of export, bigger size (measured by assets), higher productivity
(measured by value added per worker), and moderate levels of financial health
(measured by cash flow over total assets). The results are robust to the
consideration of foreign ownership and country characteristics as well as
industry and time fixed effects.
Non-technical Summary
International exporting at the firm level is subject to
fixed costs, especially the costs related to finance; e.g., up to 90% of world
trade has been estimated to rely on some form of trade finance. However,
whether these costs are paid for one time (e.g., sunk costs at the time of
entry into international markets) or each time (i.e., financial costs paid any
time exported, such as costs of shipping, duties and freight insurance before
export revenues are realized) is a subject of debate. While the former is
connected to the role of finance in the extensive margin of trade, the latter
is associated with the role of finance in the intensive margin of trade. The
existing literature agree upon the role of finance on the extensive margin of
trade. However, evidence for the role of finance on the intensive margin of
trade is limited.
Within this picture, this paper investigates the relationship
between financial health and the intensive margin of trade. Since financially
more vulnerable firms may have alternative necessities for finance, we also consider
possible nonlinearities arising from the determinants of financial
vulnerability, such as size, productivity and foreign ownership, by employing
parametric threshold and nonparametric estimation models. The Enterprise
Surveys of the World Bank are used, where the data include observations from
2380 firms across nine emerging countries. Exports are measured in U.S. dollars,
financial health is measured by the lagged value of cash flow over total
assets, size is measured by the lagged value of log assets measured in U.S.
dollars, and productivity is measured by the lagged ratio of value added
(measured in U.S. dollars) over the number of workers, where using lagged
values on the right hand side is important to control for any potential
endogeneity problem.
The empirical results show that financial health is a
significant factor in explaining the intensive margin of trade for many firms
in our sample, although the magnitude of the effect changes across firms. When
we search for a systematic explanation, we show that there are significant
nonlinearities in the relationship between finance and the level of exports:
financial health leads to higher levels of exports for highly-exporting, large,
productive or domestically owned firms, after controlling for all else.
Therefore, the role of finance on the intensive margin of trade is subject to
nonlinearities in explanatory variables as suggested by the theoretical
literature (which is discussed in details in the next section).
When we search for specific firm characteristics that are
consistent with financial health being effective on the level of exports, we
find through parametric threshold analyses that financial health is positively
and statistically significant more for firms with sizes (measured by assets)
higher than about 1,794,075(=exp(14.4)) U.S. dollars, with productivities
higher than 8.05 U.S. dollars of value added per worker, and with cash flow
over total asset measures more than 0.15. Despite their nonlinear structure,
since parametric threshold models are still restrictive due to their piecewise
linear structure on the financial health function, for robustness, when we
continue our investigation using a nonparametric model, we show that the
results are qualitatively the same and quantitatively very similar to the
parametric threshold analysis. In particular, financial health is positively
and statistically significant mostly for firms with median export values higher
than about 80,000(=exp(11.3)) U.S. dollars (corresponding to about 33% of the
observations in our sample), with median sizes (measured by assets) higher than
about 180,000(=exp(12.1)) U.S. dollars (corresponding to about 50% of the
observations in our sample), with median productivities higher than 7.12 U.S.
dollars of value added per worker (corresponding to about 46% of the
observations in our sample), and with median cash flow over total asset
measures between 0.04 and 1.02 (corresponding to about 68% of the observations
in our sample).
Hence, we provide clues for policy makers regarding which
firms are more beneficial to subsidize in order to achieve higher export
volumes that would support an export-oriented growth strategy. These results
are robust to the consideration of the nationality of firms and
country-industry-time fixed effects which are important to control for the
effects of finance across emerging countries with potentially heterogenous
characteristics where banks may be different or some firms may have export
promotion agencies whilst others may not.