Why Liquidity Matters to the Export Decision of the Firm

Under financial constraints, exporting may have less to do with productivity and more to do with financial resources. The established relationship between exporting and productivity would differ when examined through the lens of the working capital needs of the firm. The hypothesis that working capital matters in the firm's exporting decision is explored in two ways: first, by articulating a dynamic working capital model of the firm that incorporates the firm's export decision. Secondly, by testing the hypothesis empirically using a unique firm level dataset from Bangladesh, where issues of financial constraints are particularly acute. The model shows that productivity determines export status of the firm as long as it is not under financial constraints. However, under financial constraints, export status is less dependent on productivity and more dependent on the availability of working capital. Empirical results support the model's prediction. The relationship between exporting time and the need for greater liquidity is also borne out empirically as shown by a positive and significant correlation between the amount of working capital and the distance of export destination. An important policy implication from the analysis is that short term liquidity is critical in allowing productive firms to export and that access to finance may prevent the benefits of trade liberalization within a country to be fully realized.

Bibliographic Details

Main Author:	Chan, Rosanna
Language:	English en_US
Published:	World Bank, Washington, DC 2014-04
Subjects:	ACCESS TO CREDIT, ACCESS TO EXTERNAL FINANCE, ACCESS TO FINANCE, ACCESS TO FINANCIAL SERVICES, ACCOUNTING, ACCOUNTS RECEIVABLE, AGGREGATE DEMAND, ALLOCATION OF CREDIT, AMOUNT OF CREDIT, AVERAGE PRODUCTIVITY, BINDING CONSTRAINT, BOND, BONDS, BORROWING, BORROWING REQUIREMENT, BUDGET CONSTRAINT, CASH ON HAND, CD, COLLATERAL, COMMERCIAL BANKS, COMPARATIVE ADVANTAGE, CREDIT CARDS, CREDIT CONSTRAINTS, CREDIT LINE, CREDIT LINES, CURRENT ASSETS, DEBT, DEVELOPING COUNTRIES, DEVELOPMENT POLICY, DISCOUNT RATE, DOMESTIC MARKET, DOMESTIC MARKETS, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, EQUILIBRIUM MODELS, EXCHANGE RATE, EXPORTER, EXPORTERS, EXPORTS, EXTERNAL BORROWING, EXTRA WORKING CAPITAL, FINANCES, FINANCIAL ACCESS, FINANCIAL CRISIS, FINANCIAL HEALTH, FINANCIAL INFORMATION, FINANCIAL MARKETS, FINANCIAL RESOURCES, FINANCIAL SERVICES, FINANCIAL STRUCTURE, FINANCIAL SYSTEMS, FINANCING NEEDS, FIXED COST, FIXED COSTS, FOREIGN MARKETS, FOREIGN-OWNED COMMERCIAL BANKS, FUTURE RESEARCH, GENERAL EQUILIBRIUM, GENERAL EQUILIBRIUM MODELS, GLOBAL TRADE, GOVERNMENT SUBSIDIES, HOLDINGS, HOUSEHOLD SAVINGS, INFORMAL LENDERS, INPUT PRICE, INTEREST RATE, INTEREST RATES, INTERNAL FINANCE, INTERNAL FINANCING, INTERNAL FUNDS, INTERNATIONAL BANK, INTERNATIONAL FINANCE, INTERNATIONAL FINANCIAL STATISTICS, INTERNATIONAL MARKETS, INTERNATIONAL SALES, INTERNATIONAL TRADE, INVENTORIES, INVESTING, INVESTMENT CLIMATE, LENDERS, LETTERS OF CREDIT, LINE OF CREDIT, LIQUIDITY, LIQUIDITY CONSTRAINTS, LOAN, MARGINAL COST, MARGINAL VALUE, MONEY LENDER, MONOPOLISTIC COMPETITION, MOTIVATION, OPPORTUNITY COST, OPTIMIZATION, OVERDRAFT, OVERDRAFT FACILITIES, OVERDRAFT FACILITY, PHYSICAL CAPITAL, POSITIVE COEFFICIENT, PRESENT VALUE, PRICE LEVELS, PRODUCTION COSTS, PRODUCTION FUNCTION, PRODUCTION FUNCTIONS, PRODUCTIVITY, PRODUCTIVITY INCREASES, RATE OF RETURN, RECEIPT, RETAINED EARNINGS, RETURNS, SALES REVENUE, SAVINGS, SHORT-TERM DEBT, SKILLED LABOR, TERM CREDIT, TOTAL COSTS, TOTAL FACTOR PRODUCTIVITY, TRADE CREDIT, TRADE LIBERALIZATION, TRANSACTION, TRANSACTION COSTS, TRANSPORT, TURNOVER, UNSKILLED LABOR, VARIABLE COSTS, WAGES, WARRANTS, WEALTH, WORKING CAPITAL, WTO,
Online Access:	http://documents.worldbank.org/curated/en/2014/04/19404022/liquidity-matters-export-decision-firm https://hdl.handle.net/10986/18331
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