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Financial Development and the Choice of Trade Partners

Man Lung Chan and Kalina Manova

No 18867, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: What determines the choice of countries' trade partners? We show theoretically and empirically that financial market imperfections affect the number and identity of exporters' destinations. Bigger economies with lower trade costs are more attractive markets because they offer higher export profits. This generates a pecking order of destinations such that firms serve all countries above a cut-off level of market potential. Credit constraints, however, raise this cut-off above the first best. Financially advanced nations thus have more trade partners and go further down the pecking order, especially in sectors that rely heavily on the financial system. Our results provide new, systematic evidence that countries follow a hierarchy of export destinations, that market size and trade costs determine this hierarchy, and that financial frictions interact importantly with it. This has policy implications for the effects of cross-border linkages that depend on the number and identity of countries' trade partners.

JEL-codes: F10 F14 F36 G20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2013-03
Note: DEV IFM ITI
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Published as Journal of Development Economics Volume 116, September 2015, Pages 122–145 Cover image Financial development and the choice of trade partners Jackie M.L. Chan , Kalina Manova,

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