Access to Finance, Financial Development and Firm Ability to Export: Experience from Asia–Pacific Countries

• DOI: http://doi.org/10.1111/asej.12140
• Author: Durairaj Kumarasamy,Prakash Singh
• Date: 01 March 2018
• Published date: 01 March 2018

Access to Finance, Financial Development and

Firm Ability to Export: Experience from Asia–

Pacific Countries

Durairaj Kumarasamy and Prakash Singh

Received 13 January 2016; Accepted 27 December 2017

With particular reference to Asia–Pacific countries, the present study examines

how access to finance and financial development affects firms’ability to enter

export markets. Using firm-level data from the World Bank Enterprises Survey,

we found that access to finance plays a significant role in improving firms’ability

to export. In addition, development of the financial sector fosters export market

entry. Among the financial development indicators, reach of the banking sector

variable is most prominent. The present study suggests that improvements in

access to finance and financial development (increases in the reach of the banking

sector) enable firms operating away from capital or major cities to enter export

markets easily. The present study supports policy intervention to strengthen access

to the financial sector, which would encourage firms to export, and to facilitate

export market entry for remotely located firms.

Keywords: access to finance, exports, financial development, international trade.

JEL classification codes: D22, F14, O16, O53.

doi: 10.1111/asej.12140

I. Introduction

Exports make an indispensable contribution to economic growth. Higher exports

lead to increases in income levels, more efficient allocation of resources,

improved capacity utilization, greater exploitation of scale and technological

Kumarasamy: ASEAN India Centre, Research and Information System for Developing Countries

(RIS), India Habitat Centre, Lodhi Road, New Delhi 110 003, India. Singh (corresponding author):

Centre for Regional Trade, 715, IIFT Bhawan, B-21 Qutab Institutional Area, New Delhi 110 016,

India. Email: prakash.archa@gmail.com. This research was supported by an ARTNeT post-workshop

grant awarded through the project ‘Impact of trade facilitation measures on poverty and inclusive

growth’funded by the Government of China and implemented by ARTNeT, UNESCAP, Bangkok.

The authors are grateful to the ARTNeT Secretariat for helpful comments and guidance on an earlier

draft of this paper and for technical support in disseminating this paper. We thank participants of the

RIS Breakfast Seminar for their input. We thank Professor Vigneswara Swamy for his critical input.

We also thank Professor Prabir De for his constant encouragement. The authors gratefully acknowl-

edge the comments and suggestions received from an anonymous reviewer of the Journal, which

have helped in improving the paper substantially.

© 2018 East Asian Economic Association and John Wiley & Sons Australia, Ltd

Asian Economic Journal 2018, Vol.32 No. 1, 15–38 15

improvements in response to greater competition from abroad (Burney, 1996).

Therefore, export promotion strategies have been adopted in several developing

countries to boost economic growth, including policy support to encourage non-

exporters to enter foreign markets and also to facilitate the export expansion of

existing exporters. As a result, there has been a significant increase in global

trade in general and trade within Asia–Pacific countries in particular. This is fur-

ther reflected in the trade performance of Asia–Pacific countries, which has

shown significant improvement over the past two decades. The contribution of

trade in the global value chain and regional production network has reached

75 to 80 percent of the total trade despite the global financial crisis (ESCAP,

2015). Asia–Pacific has become the largest trading region, with a 37-percent

share of world trade and almost half of Asia–Pacific trade occurring within the

region (UN-ESCAP, 2014).

In the global competitive market, exporting firms face huge challenges to

match the competitive prices and keep up with technological changes. This has

lead firms to invest heavily in R&D, marketing research, product development,

advertising and fixed capital (Hur et al. 2006). Thus, exporting firms are more

dependent on external finance to meet their liquidity needs.

1

Hence, firms with

financial constraints would face difficulty entering into and remaining in the

export market. Given the competitiveness of the global market, existing firms

essentially require additional capital to move up in the value chain. Limited

access to capital holds firms at low value-added stages of the supply chain and

restricts them from exploiting profitable opportunities. In addition, firms newly

entering into the export market require additional investment as a large part of

this investment is sunk and upfront in nature.

Access to financial instruments enables firms to boost their export competi-

tiveness by allowing them to overcome the liquidity problems associated with

export activities. Several studies discuss how financial development reduces

firms’borrowing costs, thereby encouraging firms to enter into the export mar-

ket (e.g. Beck, 2002, 2003; Svaleryd and Vlachos, 2005; Manova, 2013). Other

studies highlight that financial constraint is potentially an important cost of

international trade in a financially underdeveloped country (Manova, 2013).

Therefore, well-developed financial markets and strong banking institutions are

crucial for firms’exporting activities.

Despite the empirical research emphasizing the role of access to finance in

firm performance, access to finance is still a major problem at the firm level in

several developing countries (Beck, 2002), especially in developing countries of

Asia where the financial system remains far below the standards of developed

countries. Furthermore, effect of the 2008 financial crisis transmitted to develop-

ing countries in Asia has affected their credit disbursement. The decline in trade

finance has been more pronounced in countries with less developed financial

1 Up to 90 percent of world trade has been estimated to rely on some form of trade finance

(Auboin, 2009).

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