Chinese import competition and the provisions for external debt financing in the US

Mohammad M Rahaman ()
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Mohammad M Rahaman: Saint Mary’s University

Journal of International Business Studies, 2016, vol. 47, issue 8, No 2, 898-928

Abstract: Abstract How does international competition originating from low-wage countries affect domestic financing capacity of firms in high-wage countries? In this article, we use China’s entry into the World Trade Organization (WTO) as a quasi-natural experiment to investigate the effects of trade-induced competition originating from China on the price and design of bank-loan contracts for firms in US manufacturing industries. We find that the elevated level of Chinese import competition in the US, following China’s WTO entry, is associated with a reduction in the overall cost of bank financing for import-competing US manufacturing firms, evidenced by lower spread, higher amount, longer maturity, and less restrictive non-price contract terms such as collateral and covenants. We show that such reduction in the external financing premiums of import-competing firms is the result of trade-induced productivity gains within firms and a reallocation of financing between firms towards more capital-intensive and technologically advanced firms. These results suggest that engaging in international business activities with a low-wage country via trade openness is likely to ease the provisions of external debt financing for firms in high-wage countries.

Keywords: globalization; import competition; cost of capital; China (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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DOI: 10.1057/s41267-016-0007-2

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