Heterogeneous firms, financial constraints and export behaviour: A firm‐level investigation for China

• Author: Holger Görg,Xiaobing Huang,Xiaolian Liu
• DOI: http://doi.org/10.1111/twec.12540
• Published date: 01 November 2017
• Date: 01 November 2017

ORIGINAL ARTICLE

Heterogeneous firms, financial constraints and

export behaviour: A firm-level investigation for

China

Xiaobing Huang

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Xiaolian Liu

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Holger G€

org

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1

Gannan Normal University, Ganzhou, China

2

Kiel Institute for the World Economy, Kiel, Germany

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INTRODUCTION

The Chinese economy dominates the academic and public debate on many issues, two of which

are exports and finance. China has, over the last three decades, shown unprecedented export

growth, which has made it the top exporting nation in the world in 2014, well ahead of the Uni-

ted States and Germany.

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At the same time, access to finance is known to be problematic for

many firms, in particular privately owned small firms in China, leading to severe credit con-

straints.

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Several papers investigate the link between financial constraints and Chinese firms’exports.

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Du and Girma (2007) show using bank loans normalised by total assets that access to bank loans

is associated with greater export market orientation. Li and Yu (2013) conclude that Chinese firms

with fewer credit constraints export more, and foreign enterprises that enjoy lower credit con-

straints have higher exports than domestic companies. Manova, Wei, and Zhang (2011) demon -

strate that limited credit availability hinders firms entering more destination mark ets, using

financial vulnerability measured at sector level. Egger and Kesina (2013) approximat e credit con-

straints by four internal financial variables and find that the credit-constrained firms are less likely

to be exporters and have lower export quotas.

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http://www.statista.com/statistics/264623/leading-export-countries-worldwide/

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According to the Investment Climate Assessment surveys in 2002, China was among the group of countries that had the

worst financing obstacles (Claessens, 2006).

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A growing body of literature theoretically investigates the link between financial constraints and exporting activities

(Chaney, 2005; Feenstra, Li, & Yu, 2011; Li & Yu, 2013; Manova, 2010; Muuls, 2015), and a growing number of empiri-

cal evidences spinning different countries and time span accordingly emerges (Amiti & Weinstein, 2009; Bellone, Musso,

Nesta, & Schiavo, 2010; Besedes, Kim, & Lugovskyy, 2011). Greenaway, Guariglia, and Kneller (2007) however find that

the probability of entry into exporting is not affected by financing problems using firm-level data for the UK. Berman and

H

ericourt (2010) also discover that financing problems do not influence export values in a sample of nine developing coun-

tries.

DOI: 10.1111/twec.12540

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©2017 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/twec World Econ. 2017;40:2328–2353.

We study in this paper the impact of access to finance on exports using Chinese firm-level data.

We distinguish two modes of external finance, namely bank loans and issuing stocks to sharehold-

ers. We not only consider the impact either of these has individually on export behaviour, but also

their interaction. This allows us to investigate whether there are complementarities in the use of

these sources of finance—is “the more, the better”true for exporting? We build the two external

sources, as well as internal finance, into a heterogeneous firm-type model, which allows us to

investigate the relationship between financial constraints and firms’exports. We examine the mod-

el’s predictions empirically using a comprehensive longitudinal firm-level data set from China. As

far as we are aware, this is the first paper to consider these different financial options in theory

and empirics.

Our paper contributes to the current literature in several aspects. First, our theoretical

model captures three different financial channels including internal liquidity endowment,

external borrowing and issuing stocks. Second, Wagner (2014) points out that the reliability

of relevant studies suffers from diverse proxy variables for financial constraints such as liq-

uidity ratio, cash flow and other financial ratios. Unlike previous studies, we utilise infor-

mation on interest expenditure and a dummy variable whether a firm can issue stocks or

not to measure the financial constraints directly. Third, we further investigate the interrela-

tionship between different financial options, which we find to be important but is over-

looked by previous studies.

Theoretical predictions indicate that some firms are prevented from exporting due to

financial constraints, and firms would be more likely to export and export more if they

were less restricted by financial constraints. These constraints could be alleviated through

better access to external financial resources or issuing stocks to shareholders. Our empirical

results are strongly consistent with the theoretical predictions. Firms who have more interest

expenditure or can issue stocks to their shareholders have higher propensities to export and

export more. Moreover, the more financial options a firm have, the better a firm performs

in terms of export volume and export propensity. Finally, the effects of the relaxation of

financial constraints on export behaviour are stronger for state-owned enterprises (SOEs),

firms located in the Eastern region and large-scale firms, as these appear to be less finan-

cially constrained.

The remainder of the paper is organised as follows. Section 2 develops the theoretical model.

Section 3 introduces the data, sets up the empirical model and introduces estimation approaches.

Section 4 analyses benchmark results, subsample results and robustness checks. The last section

concludes.

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THE MODEL

To motivate the subsequent empirical analysis, we present a simple theoretical framework within

which we can interpret our empirics. Our theoretical model follows Li and Yu (2013) and expands

on the number of financing options available to a firm.

Consider two countries, home and foreign (henceforth foreign country is denoted with an

asterisk *). Labour is the only factor of production, and the size of the population is L at home.

There are two sectors, where the first sector produces a single homogeneous good at constant

returns to scale that is freely traded and chosen as the numeraire, and the price of the homoge-

neous good can be normalised to one. Each unit of labour in this sector produces a given

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