Financial frictions and trade intermediation: Theory and evidence

Jackie M.L. Chan

European Economic Review, 2019, vol. 119, issue C, 567-593

Abstract: This paper examines the impact of financial frictions on exports through trade intermediaries theoretically and empirically. I present a heterogeneous firm model of trade intermediation and financial frictions, in which firms require external finance for their trade costs. Since exporting through intermediaries entails lower fixed costs but higher variable costs, firms facing greater financial frictions are more likely to pursue intermediated trade. The model finds strong empirical support in rich data for indirect versus direct exporting at both the micro and macro levels. Micro-level data for over 9,000 firms in 115 countries reveals that financially more constrained firms are more likely to use trade intermediaries in exporting. Correspondingly, macro-level data of entrepôt trade through Hong Kong for 56 exporting countries shows that financially less developed countries are more likely to rely on trade intermediation. Both of these effects are stronger in financially more vulnerable industries and are not driven by other firm- and country-level determinants of exporting. These results have policy implications for the role of trade intermediaries in compensating for capital market frictions, in particular, as a means to enhance the gains from trade.

Keywords: Trade intermediaries; Indirect exports; Financial frictions; Credit constraints; Hong Kong (search for similar items in EconPapers)
JEL-codes: F10 F14 F36 G20 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:119:y:2019:i:c:p:567-593

DOI: 10.1016/j.euroecorev.2018.04.002

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