Financial constraints and foreign market entries or exits: firm-level evidence from France
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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.
KeywordsFirm heterogeneity Financial constraints Trade
JEL ClassificationF1 G1
We are grateful to Philippe Aghion, Gilbert Cette, Thierry Mayer, seminar participants at the Banque of France and the Paris School of Economics, and an anonymous referee for very useful comments and discussion. Aida Caldera gratefully acknowledges the hospitality of the Banque de France where part of the research was conducted during the winter of 2008–2009.
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