Bank credit, public financial incentives, tax financial incentives and export performance during the global financial crisis
| Published date | 01 January 2020 |
| Author | Mita Bhattacharya,Nicholas Apergis,Luke Emeka Okafor |
| DOI | http://doi.org/10.1111/twec.12848 |
| Date | 01 January 2020 |
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wileyonlinelibrary.com/journal/twec World Econ. 2020;43:114–145.
© 2019 John Wiley & Sons Ltd
Received: 12 November 2018
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Revised: 10 June 2019
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Accepted: 5 August 2019
DOI: 10.1111/twec.12848
ORIGINAL ARTICLE
Bank credit, public financial incentives, tax
financial incentives and export performance during
the global financial crisis
Luke EmekaOkafor1
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MitaBhattacharya2
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NicholasApergis3
1School of Economics,University of Nottingham Malaysia, Semenyih, Malaysia
2Department of Economics,Monash University, Melbourne, Vic., Australia
3Department of Banking and Financial Management,University of Piraeus, Pireas, Greece
KEYWORDS
bank credit, export performance, financial development, firm size, public financial incentives, tax financial incentives
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INTRODUCTION
International trade flows declined sharply in the wake of the 2008 global financial crisis (GFC) in
a way that was significantly higher relative to historical evidence (Baldwin, 2009; Constantinescu,
Mattoo, & Ruta, 2015). The volume of goods and services exported declined by 11.2% in advanced
economies and by 7.6% in emerging and developing economies over the peak period of the crisis
(Contessi & De Nicola, 2012). The magnitude of the drop in global trade reignited academic interest
on finance–trade nexus given that the empirical evidence is mixed.
Campello, Graham, and Harvey (2010) show that a majority of firms avoided a significant number
of attractive investment opportunities due to their inability to access external funds during the crisis.
This finding suggests that inadequate access to credit potentially inhibits exporting activity, especially
during the period of financial crisis. Similarly, Minetti and Zhu (2011) find that the likelihood of ex-
port market participation is 39% smaller for credit‐rationed firms in Italy. Conversely, Behrens,
Corcos, and Mion (2012) find that finance plays only a minor role in the collapse of global trade flows
during the crisis. The mixed evidence may result from a failure to account for the influence of degree
of access to credit and/or financial incentives1 and firm size in the underlying relationship.
While access to credit has been used previously in extant literature as a proxy for financial con-
straints, the role of financial incentives in promoting export competitiveness has not hitherto been
explored. In addition, the influence of the degree of access to credit and/or financial incentives on
export performance or the issue of whether the influence of access to financial incentives on export
performance differs by firm size has not been explored.
Understanding the role of both access to credit and financial incentives in promoting export com-
petitiveness has significant policy implications, particularly during periods of crisis. The significance
1 Financial incentives refer to public financial incentives and tax financial incentives.
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of policy implications is more pronounced in countries which are involved in extensive cross‐border
trade activities, particularly as a mechanism to promote economic growth. For instance, improving
firms' access to credit and/or financial incentives during the period of a crisis could help to boost ex-
port competitiveness. Higher export competitiveness would lead to higher income levels, higher levels
of employment, greater exploitation of economies of scale and international technology spillovers,
among others. Access to credit and/or financial incentives during the period of crisis is potentially
important for export competitiveness and economic growth. Therefore, the purpose of this paper is
to estimate the effects of access to credit, public financial incentives and tax financial incentives on
export performance of firms during the 2008 global financial crisis. The analysis also explores the
roles of financial development and firm size in the underlying relationship using comparable firm‐
level cross‐country data, mainly from 2008 and spanning seven European countries: Austria, France,
Germany, Hungary, Italy, Spain and the UK. In this paper, the degree of access to credit or financial
incentives is used as a proxy for financial development.
There is some evidence that banks tighten their lending criteria during the global financial crisis,
thus limiting access to external funds especially for firms with heavy dependence on bank credit
(Guariglia, Spaliara, & Tsoukas, 2016). In the presence of credit crunch, however, firms could relax fi-
nancial constraints by seeking cheap sources of external finance, such as financial incentives provided
by the public sector or tax financial incentives. Access to financial incentives could help firms to re-
duce the impact of financial constraints on their export activities. In this instance, financial incentives
might serve as a substitute for bank credit, especially during the period of a credit crunch. For exam-
ple, the European Union routinely provides financial support to firms in the form of low‐interest loans,
guarantees, grants and tax relief (Bannò & Sgobbi, 2010; Colombo, Grilli, & Verga, 2007; El‐Agraa,
2011). Bannò and Sgobbi (2010) find that financially constrained firms are more likely to participate
in public financing programmes. This finding is consistent with the notion that public subsidies may
help firms cope with the sunk costs of export activities (Roberts & Tybout, 1997).
This study contributes to the literature that relates to finance–trade nexus in three ways. First, in
contrast to previous literature where credit is commonly used as a proxy for financial constraints, this
study uses both public and tax financial incentives as additional proxies of financial constraints.
Second, the study shows that the effects of access to credit and public financial incentives during the
crisis are dependent on the degree of financial development of a country. Third, this study shows that
the influence of financial incentives on export performance during the crisis is size‐dependent.2
The remainder of the paper is set out as follows. The following section presents a review of related
literature. Section 3 provides an overview of the data and definitions of variables. Section 4 discusses
the empirical model, while Section 5 explains the methodology and presents the descriptive statistics.
Section 6 discusses the empirical results and robustness checks. The final section summarises the
major findings.
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LITERATURE REVIEW
There are several theoretical grounds for the link between access to finance and export market be-
haviour. Chaney's (2016) theoretical model predicts that financial constraints are the key determinant
of export market behaviour. In the presence of fixed costs of exporting, only firms that can generate
adequate liquidity from domestic sales, as well as being productive enough, can afford to export. The
2 Following Eurostat Classification of Enterprises, firms employing 250 or more persons are classified as large, otherwise as
intermediate firms. Firms with intermediate scale of production are considered as small and medium firms (Eurostat, 2008).
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model also predicts that a deepening or widening of financial markets will raise the level of exports.
A deepening of financial markets occurs when firms have more access to external finance, whereas a
widening of financial markets occurs when firms have more access to cheap external finance. Access
to external finance, in this instance, potentially lowers barriers to exporting activities, thereby creating
an enabling environment for more firms to export as well as boost export volumes. Similarly, Manova
(2013) incorporates financial constraints into a heterogeneous firm model. The model posits that fi-
nancial constraints not only serve as a barrier to export market entry, but can also distort the level of
exports when firms need external finance to cover their fixed and variable costs of exporting.
A survey of empirical studies that relate to credit constraints and exports suggest that financial
constraints play important role in exporting choices of firms (Wagner, 2014). Credit plays a crucial
role in the promotion of export activities. In particular, exporters rely more on credit to finance work-
ing capital than non‐exporters, due to the additional costs associated with exporting activities, such as
higher transport and insurance costs.
As noted earlier, studies in the extant literature suggest that financial constraints potentially limit
investment opportunities and by extension exporting activities (Bernanke & Gertler, 1987; Clementi
& Hopenhayn, 2006), though the empirical evidence is rather mixed and inconclusive. Quite a few
studies have, however, focused on the interplay between financial constraints and exporting activities
using cross‐country firm‐level data that are comparable across several countries during the 2008 GFC.
For instance, Greenaway, Guariglia, and Kneller (2007) show that exporters display better financial
health than non‐exporters using panel data from the UK. However, there is no evidence that less fi-
nancially constrained firms ex‐ante are more likely to enter export markets.
Similarly, Berman and Héricourt (2010) using cross‐country firm‐level data from nine developing
and emerging economies find that better financial health improves neither the likelihood of remaining
an exporter once a firm has entered foreign markets nor the scale of exports. In support, Arndt, Buch,
and Mattes (2012) report that self‐reported financial constraints have no strong impact on the interna-
tional choices of firms in terms of selection into exporting and export volumes using German micro‐
level data. Stiebale (2011) reported a similar finding by showing that there is no strong evidence that
financial constraints have a direct impact on participation in foreign markets or foreign sales volume
after controlling for observed and unobserved firm‐specific effects.
In contrast, based on customs data from the universe of Chinese firms that participated in interna-
tional trade in 2005, Manova, Wei, and Zhang (2011) report that foreign affiliates and joint ventures
exhibit a better export performance than private firms, especially in sectors where firms are heav-
ily dependent on external finance. Credit constraints potentially inhibit export activity, but foreign
firms overcome this problem by obtaining liquidity from parent companies or through their networks.
Similarly, Wagner (2013) finds that a good credit rating of a firm is positively related to both the
likelihood that the firm is an exporter and the volume of its exports for firms operating in Germany.
Firms that are less financially constrained are more likely to be more efficient and more profitable.
This is consistent with Muûls's (2015) finding that less credit‐constrained, more productive and more
profitable firms have an increased likelihood of being exporters. She also finds that credit constraints
are positively associated with the total number of export destinations, whereas their impact on the
number of product lines is insignificantly different from zero. In support, Lin (2017) shows that inad-
equate access to capital inhibits firms from export market directly.
Recent empirical studies on the trade–finance nexus suggest that financial constraint can hinder
exporting activities especially during the period of crisis. For instance, Görg and Spaliara (2018)
show that firms in less healthy financial positions face increased risk of exiting from export markets
during the 2008 GFC in the UK. Similarly, Forte and Salomé Moreira (2018) find that small and me-
dium‐sized enterprises in poor financial positions are less likely to export during the period 2008–12
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