Review of World Economics

, Volume 151, Issue 2, pp 231–253 | Cite as

Financial constraints and foreign market entries or exits: firm-level evidence from France

Original Paper

Abstract

In contrast to a large strand of the literature that focuses on multi-product firms, this paper examines multi-destinations firms and the effects of financial constraints on newly served and newly exited destinations. Intuitively, financial constraints have a negative impact on firm expansion in new destinations by limiting firm ability to finance entry costs. The effect on exit from existing destinations is ambiguous. Due to financial constraints, a firm may face difficulties financing the recurrent costs of maintaining her market presence. But if financial constraints also affect entry, the firm may have strong incentives to stay in a given destination since it may not be able to fund the fixed entry costs associated to the reallocation of her portfolio of destinations. We develop a simple theoretical model which includes these two effects. We use a unique longitudinal dataset on French firms that contains information on export destinations of individual firms and allows to construct various firm-level measures of financial constraints to test these predictions. The empirical results suggest that financial constraints hamper a firms’s ability to cover fixed entry costs as well as recurrent costs associated with maintaining the presence in a foreign market, thereby reducing the probability of entering into a new foreign markets and increasing the probability of exiting from an existing foreign market.

Keywords

Firm heterogeneity Financial constraints Trade 

JEL Classification

F1 G1 

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Copyright information

© Kiel Institute 2015

Authors and Affiliations

  1. 1.CNRS-Paris School of EconomicsParisFrance
  2. 2.OECDParisFrance
  3. 3.Banque de FranceParis Cedex 01France

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