Liquidity Constrained Exporters

Abstract

I build a model of international trade with liquidity constraints. If firms must pay some entry cost in order to access foreign markets, and if they face liquidity constraints to finance these costs, only those firms that have sufficient liquidity are able to export. A set of firms could profitably export, but they are prevented from doing so because they lack sufficient liquidity. More productive firms that generate large liquidity from their domestic sales, and wealthier firms that inherit a large amount of liquidity, are more likely to export. This model predicts that the scarcer the available liquidity and the more unequal the distribution of liquidity among firms, the lower are total exports. I also offer a potential explanation for the apparent lack of sensitivity of exports to exchange rate fluctuations. When the exchange rate appreciates, existing exporters lose competitiveness abroad, and are forced to reduce their exports. At the same time, the value of domestic assets owned by potential exporters increases. Some liquidity constrained exporters start exporting. This dampens the negative competitiveness impact of a currency appreciation. Under some circumstances, it may actually reverse it altogether and increase aggregate exports. This model provides some argument for competitive revaluations.

Determinants of Financial Constraints: The Effect of Financial Crisis and Heterogeneity Across Industries

“…They find that firms starting to export display a significant ex-ante financial advantage compared to their non-exporting counterparts. Such result is in line with Chaney's (2005) theoretical prediction that limited access to external financial funds may prevent some firms that could otherwise profitably enter foreign markets from selling their products abroad. As stressed by Greenaway, et.al (2007) since staring of exporting involves an initial fixed investment, export market participation decisions are likely to be affected by financial variables in the same manner as investment in fixed capital.…”

Financing constraints, firm dynamics, export decisions, and aggregate productivity

“…Moreover it generates realistic firm dynamics, and can be interpreted as a shortcut for more realistic models of firm dynamics with financing frictions. 7 The limitation of this assumption is that it imposes that financing frictions do not affect the investment in variable inputs of the firm. However this limitation is justified by one considerable advantage: together with the assumption of the linearity of the profits shock (see equation 6), it keeps the model considerably easier to solve and more comparable to the basic Melitz (2003) 7 For instance, Clementi and Hopenhayn (2006) derive the optimal long term bank-firm contract under asymmetric information.…”

“…A sustained assumption of the models in this literature is that firms are heterogeneous in their productivity levels and decide to become exporters by paying a fixed initial cost. The role of financing constraints in the context of this family of models has been explored by Chaney (2005) by introducing exogenous financing constraints as an additional source of heterogeneity across firms. In Chaney (2005) firms need cash in advance to pay for the fixed costs of exporting and some of them are exogenously financially constrained.…”

Determinants of internal and external R&D offshoring: evidence from Spanish firms

“…According to Chaney (2013), when faced with fixed costs associated with exporting and liquidity restrictions, for some firms it would be profitable to export, but they decide not to because of the doubts that they have that liquidity is not enough.…”