Credit rationing and firm exports: Microeconomic evidence from small and medium‐sized enterprises in China

• Published date: 01 January 2021
• DOI: http://doi.org/10.1111/twec.12913
• Date: 01 January 2021
• Author: Jian Yu,Yong Tan,Dong Cheng

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wileyonlinelibrary.com/journal/twec World Econ. 2021;44:286–311.

© 2019 John Wiley & Sons Ltd

Received: 14 December 2018

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Revised: 12 November 2019

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Accepted: 17 November 2019

DOI: 10.1111/twec.12913

ORIGINAL ARTICLE

Credit rationing and firm exports: Microeconomic

evidence from small and medium-sized enterprises

in China

DongCheng1

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YongTan2

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JianYu3

1Department of Economics, Union College, Schenectady, New York, USA

2School of International Trade and Economics, Nanjing University of Finance and Economics, Nanjing, China

3School of Economics, Central University of Finance and Economics (CUFE), Beijing, China

Funding information

Program for Young Talents, Grant/Award Number: QYP1907; National Social Science Foundation of China, Grant/Award

Number: 14ZDB120 and 18VSJ017; National Natural Science Foundation of China, Grant/Award Number: 71703067 and

71973059; Beijing Social Science Fund, Grant/Award Number: 19LJB001

KEYWORDS

firm exports, SMEs, strong credit rationing, weak credit rationing

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INTRODUCTION

The strength of a country's financial markets and the availability of capital have a pronounced influ-

ence on economic growth, considering that external finance supports firm-level expansion and export

activity (Benfratello, Schiantarelli, & Sembenelli, 2008; Berman & Héricout, 2010; Chaney, 2016;

Feenstra, Li, & Yu, 2014; Guiso, Paola, & Zingales, 2004; Lizal & Svejnar, 2002; Mancusi & Vezzulli,

2014). A robust financial market where frictions are minimal encourages firm-level R&D investment,

innovation and export participation (Guiso et al., 2004; Lizal & Svejnar, 2002; Mancusi & Vezzulli,

2014). R&D and innovation are key factors that affect a firm's export performance, but they are char-

acterised by high fixed costs.1 At the same time, penetrating foreign markets involves significant

1 Aw et al. (2011) and Dai and Yu (2013), for instance, separately document that firms which invest in R&D prior to their

export are more likely to succeed and gain productivity growth after export. However, despite the benefits of R&D, only

large firms can afford the expensive fixed R&D costs and achieve export success.

We are grateful to Mario J. Crucini, Taiji Furusawa, Atsushi Inoue, Yi Lu, Joel Rodrigue and Yoto Yotov for their invaluable

comments and feedback. We are also grateful to two anonymous referees and the editor for providing valuable comments that

significantly improve this paper. We would like to thank participants at CTRG conference in Xiamen (2017), CESA conference in

Sydney (2018) and APTS in Tokyo (2019). Jian Yu acknowledges the financial support from the National Social Science

Foundation of China (14ZDB120), and the Beijing Social Science Fund Project (19LJB001). Yong Tan acknowledges the financial

support from the National Natural Science Foundation of China (71703067), National (Major) Social Science Foundation of China

(18VSJ017) and National Natural Foundation of China (71973059). All authors have equal contributions in this paper.

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CHENG Et al.

start-up fixed costs (Arkolakis, 2011; Bai, Krishna, & Ma, 2017; Manova, 2013; Minetti & Zhu,

2011). Berman and Héricout (2010) show that to be successful as exporters, firms must collect infor-

mation on foreign markets, design products to fit foreign preferences, set up distribution networks, and

advertise to achieve market awareness and penetration. For example, estimates of the cost of entering

a foreign market range from US$347,549 to 538,986 for Chilean exporters (Morales, Sheu, & Zahler,

2019). This highlights the importance of external financing on firm export performance.

With the availability of micro firm-level data, a growing body of research has examined the link be-

tween financial market imperfections and firm-level export performance. However, causal evidence of

the link between financial constraints and export performance is still mixed. Greenaway, Guariglia, and

Kneller (2007), for instance, find that financial constraints have a trivial effect on firm export participa-

tion. In contrast, Berman and Héricout (2010) document a strong link between financial development

and firm-level extensive/intensive margins of exporting. These contrasting results are due to differences

in the extent to which firms rely on external finance.2 In particular, large firms can finance their R&D

and market entry costs from internal liquidity and rely less on external financing. In contrast, small and

medium-sized enterprises (SMEs) often lack internal liquidity and depend more on financial markets to

finance R&D and market entry costs. The goal of this paper is to fill the gap in the literature by studying

the impact of credit rationing caused by financial market imperfections on SMEs' export performance.

China offers an ideal setting to investigate the effect of credit rationing on the export performance

by SMEs for a number of reasons. First, commercial banks in China provide loans disproportionately

across firms in the private sector, which contains the majority of SMEs. In particular, Firth, Lin, Liu,

and Wong (2009) find that state-owned banks in China issue loans to SMEs based on their financial

health and organisational efficiency. This feature generates variation in the extent to which credit is

available at the firm level and can be used to identify the effect of credit rationing on SMEs. Second,

SMEs are likely to face higher costs of external finance relative to state-owned enterprises (SOEs) and

are typically more constrained in their R&D investing than large established firms.3 As such, a consid-

erable percentage of SMEs in China engage in exporting through state-owned intermediaries (Bai et

al., 2017), which reduces firm-level export profits. This makes studying the impact of credit rationing

on SMEs' export activities economically important. Third, SMEs account for over 90% of registered

enterprises in China and 60% of the gross domestic product (GDP) (Lin, Qin, & Chi, 2015).

Furthermore, SMEs in China have created 80% of the job openings in urban areas in 2014. Given the

important role of SMEs in the Chinese economy, reducing financial market imperfections and finan-

cial constraints for SMEs would provide a boost to China's economy.

Using a novel data set containing firm-level information on financial constraints and production of

SMEs in Zhejiang province during 2015–16,4 we identify the casual effect of credit rationing on

SMEs' export performance. This data set is compiled from a survey in which firms answer a question

about whether they have faced difficulties in accessing external finance. If the answer is yes, the firm

is defined as credit rationed.5 We find that credit rationing has a statistically significant and negative

effect on firm-level extensive and intensive export margins. Specifically, credit rationing decreases

2 Manova et al. (2015) also highlight the heterogeneous impact of financial constraints on firms with different levels of

productivity that belong to different industries.

3 Cull and Xu (2003) document that in China, SOEs can obtain policy loans or transfers at relatively low costs, but this type of

loan is not available to SMEs.

4 Zhejiang province is an export-oriented province. In 2014, trade values account for more than 50% of GDP in Zhejiang

Province. In addition, SMEs in Zhejiang account for 97% of all registered firms.

5 Please see Section 3.2 for more details about the definition of firm-level credit rationing.