Financial Constraints and the Extensive and Intensive Margin of Firm Exports: Panel Data Evidence from China

• Date: 01 November 2014
• DOI: http://doi.org/10.1111/rode.12107
• Published date: 01 November 2014

Financial Constraints and the Extensive and

Intensive Margin of Firm Exports: Panel Data

Evidence from China

Peter H. Egger and Michaela Kesina*

Abstract

Some theoretical work suggests credit constraints to hamper exports while other work suggests that they

deter firms’ sales at large. Hence, credit constraints might reduce the export–sales ratio or not. This paper

assesses the role of credit constraints for the export–sales ratio at the firm level. We explore this hypothesis

empirically, using cross-section and panel data on Chinese enterprises compiled by the National Bureau of

Statistics of China. We approximate credit constraints by a firm’s ratio of liquid debt to sales and, alterna-

tively, the ratio of liquid assets to total assets. In particular, we estimate the impact of these financial funda-

mentals on the extensive and the intensive margins of firm-level exports in two-part fractional response

models. Fixed effects panel regressions point to a negative relationship between export–sales ratios and

credit constraints only at the extensive margin.

1. Introduction

Economic theory hypothesizes that financial constraints impair firms’ opportunities of

market entry and their expansion investments. Empirical evidence suggests that this

problem is particularly pertinent for young and small firms, which are key to an econ-

omy’s growth owing to their over-proportional contribution to a country’s innova-

tions.1Small firms’ market entry and continuation in general are particularly sensitive

to fixed costs. Moreover, small firms’ export market entry and exit are highly sensitive

to fixed export costs, inter alia leading to a short tenure of the majority of firms at

export markets (Besedes and Prusa, 2006, 2011).

While a young theoretical literature explores the role of financial constraints for

market entry domestically and through exporting, empirical work on the matter is still

relatively scarce, especially, at the level of the firm (Ganesh-Kumar et al., 2001;

Greenaway et al., 2007; Bridges and Guariglia, 2008; Bellone et al., 2010; Berman and

Héricourt, 2010; Silva, 2011). It is this paper’s goal to contribute to the latter strand of

work by exploring responses of export–sales ratios at the extensive and intensive firm

margins in an integrated econometric approach. The latter is important since an iso-

lated treatment of the extensive and intensive margins might lead to biased estimates

of comparative static effects for firm-level economic outcome. Specifically, the paper

asks whether finance constraints matter at the extensive and intensive margin of the

export–sales ratio. If they are found to matter at the extensive margin (whether a firm

exports at all), this can be viewed as evidence of the importance of finance constraints

for fixed export market access costs (and investment). If finance constraints are found

to matter at the intensive margin (how big of a share an exporting firm exports in total

* Kesina: ETH Zurich, LEE G116, Leonhardstrasse 21, 8092 Zurich, Switzerland. Tel: +41-446339264;

E-mail: kesina@kof.ethz.ch. Egger: ETH Zurich, Zurich, Switzerland. We would like to thank two anony-

mous reviewers for numerous helpful comments on earlier versions of this manuscript.

Review of Development Economics, 18(4), 625–639, 2014

DOI:10.1111/rode.12107

© 2014 John Wiley & Sons Ltd