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.
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Notes
Other studies investigate whether financial constraints matter for entry into export markets using data for different countries. Manole and Spatareanu (2010) find that Czech exporters are less financially constrained than non-exporters and that less constrained firms self-select into exporting rather than exporting alleviating firms’ financial constraints. Arndt et al. (2012) find that less financially constrained firms are more likely to start exporting using German data.
Although the sources of data also contain information on firms in service sectors, we restrict our attention to the manufacturing sector for the sake of homogeneity. Exports in the services sector are quite different from manufacturing since not all the services are traded.
See Hilbe (2011).
For a detailed description of the estimation of total factor productivity based on the Solow residual, together with the approach used to construct the stock of capital see Irac (2008). If we remove TFP or employment, the magnitudes of the estimated key coefficients are slightly larger.
Alternatively, we clustered observations according to firm Ids. In that case, the estimated coefficients (not reported) for the various measures of credit constraints are larger and more significant.
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Acknowledgments
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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Askenazy, P., Caldera, A., Gaulier, G. et al. Financial constraints and foreign market entries or exits: firm-level evidence from France. Rev World Econ 151, 231–253 (2015). https://doi.org/10.1007/s10290-014-0206-5
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DOI: https://doi.org/10.1007/s10290-014-0206-5