Export quality differentiation under credit constraints

Ciani, Andrea; Bartoli, Francesca

doi:10.1111/twec.12938

Cited by 16 publications

(9 citation statements)

References 47 publications

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“…4 Our analysis suggests that trade liberalization alters economic incentives-in particular with respect to innovation and R&D-for companies in emerging economies. While previous research shows that tariff policy affects quality choice among firms (Fan et al 2015a, Ciani andBartoli 2020), our model suggests that this is a more generic feature when capital market imperfections are present. Adding to previous research, we show both theoretically and empirically how trade liberalization in developing countries affects both credit constraints and innovative activity.…”

Section: Introductioncontrasting

confidence: 67%

Innovation and trade in the presence of credit constraints

Föllmi

Legge

Tiemann

2021

Canadian J of Economics

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This paper examines how trade liberalization affects investments in R&D at the firm level. In a model where entrepreneurs are heterogeneous in their wealth endowment, they rely differently on external funds. In the presence of capital market imperfections, this implies heterogeneous access to external funds such that poor entrepreneurs run smaller firms, are less likely to invest in R&D, and more likely to exit the market. Decreasing trade costs resulting from tariff reductions exacerbate these characteristics. Using firm-level panel data on seven Latin American countries for 2006 and 2010, we find support for our theoretical predictions. While recent studies emphasize a positive impact of trade liberalization on firms' productivity-enhancing activities, we provide novel evidence showing that financial constraints can impair the effect on R&D efforts. To address potential endogeneity concerns, we verify our findings using external financial dependence based on U.S. firms. These results suggest that imperfect capital markets can prevent welfare gains from trade liberalization to materialize.

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Section: Introductioncontrasting

confidence: 67%

Innovation and trade in the presence of credit constraints

Föllmi

Legge

Tiemann

2021

Canadian J of Economics

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“…They attribute this pattern to quality differentiation. The positive correlation between product quality and FD is also well‐documented (e.g., Ciani & Bartoli, ; Fan, Lai, & Li, ). Additionally, Secchi, Tamagni, and Tomasi () show that firms facing tight credit constraints charge higher export prices in the presence of both quality and cost adjustment effects.…”

Section: Introductionmentioning

confidence: 66%

Asymmetric effects of financial development on export price and quality across countries

Choi

Lugovskyy

2019

Rev International Economics

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A large body of literature has emphasized the importance of financial development (FD) for economic growth and exporting. 1 Nonetheless, recent empirical findings have shown that FD does not affect the growth of low-income countries. 2 These findings raise questions about how FD affects exporting, and whether FD benefits all exporting countries equally.These aforementioned questions motivate us to explore the effects of FD on two essential components of exporting: export prices and export quality. 3 We find that these effects are highly asymmetric across countries, and we provide an explanation for these asymmetries. Additionally, our findings suggest that improving the quality of financial institutions alone is unlikely to boost quality or lower export prices in low-income countries.Theoretically, we provide a unifying framework to explain why and how the effects of FD on export quality and prices differ across countries. A key component of our model is based on the AbstractWe derive two novel predictions: financial development has a more pronounced effect on quality in countries with greater labor productivity, and its effect on export prices is U-shaped in labor productivity. We confirm our predictions empirically and show that the negative effect of financial development on export prices is greatest in middle-productivity countries, while its positive effect on quality is strongest in the most productive countries. Our findings contribute to the literature on the poverty trap: we argue that improving the quality of financial institutions alone is unlikely to boost quality or lower prices of the poorest countries. | 595 CHOI and LUGOVSKYYcomplementarities between different inputs-capital, labor productivity, and entrepreneurial talentin the production function of quality. Building on Verhoogen (2008), we employ a discrete choice model, where the production function of quality contains the elements of O-ring technology (Kremer, 1993). We extend it in two important dimensions: first, we introduce the liquidity constraints of exporting firms in the model and assume that the cost of borrowing decreases in FD. 4 Second, in line with the labor search literature, 5 we assume a positive correlation between labor productivity and entrepreneurial talent across countries.The model provides three testable predictions: (i) controlling for quality, better FD decreases export prices; (ii) FD has a positive effect on export quality, and more so in countries with higher labor productivity, and (iii) for sufficiently large parameter regulating the share of capital in the production function, the effect of FD on export prices is U-shaped in labor productivity.The first effect is the most straightforward: given the same set of inputs, a lower cost of borrowing reduces the total cost and sequentially the price. The second effect is due to the super-modularity of the production function of quality in inputs. As a result, any reduction in the variable production cost-including lower borrowing costs owing to better developed financi...

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“…Indeed, Fan et al (2015) note that limited access to finance causes firms to act in ways that would be suboptimal in normal times, which may lead them to produce lower-quality products. In general, available empirical evidence corroborates the important role of finance for product upgrading (Fan et al 2015;Crino and Ogliari 2017;Ciani and Bartoli 2020).…”

Section: Related Literaturementioning

confidence: 59%

Trust, Efficient Contracting and Export Upgrading

Ndubuisi

Owusu

2021

Eur J Dev Res

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Informal contracting institutions constitute an essential part of a country’s overall contracting institution, however, the nascent literature examining the effect of contracting institutions on the quality of products a country produces and exports, have paid a limited attention on the role of informal contracting institutions. We fill this gap in the literature by examining whether higher trust levels, as an informal contracting institution, leads to product-quality upgrading by reducing contractual frictions and opportunistic behaviors. Using industry-level data spanning 1995–2014, we examined this relationship using the generalized difference-in-difference method. We find that contract-intensive industries in trust-intensive societies experience a disproportionally higher increase in the production and export of higher-quality products compared to those industries in low-trusting societies. This result holds after controlling for conventional sources of comparative advantage and formal contracting institution. Hence, the result underscores the importance of informal contracting institutions for improved economic performance and stress the crucial fact that countries with strong and efficient informal institutions can still benefit in market-related activities even in the presence of weak formal institutions.

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Export quality differentiation under credit constraints

Cited by 16 publications

References 47 publications

Innovation and trade in the presence of credit constraints

Innovation and trade in the presence of credit constraints

Asymmetric effects of financial development on export price and quality across countries

Trust, Efficient Contracting and Export Upgrading

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