Bank Internationalization and Firm Exports: Evidence from Matched Firm–Bank Data

• Author: Raffaello Bronzini,Alessio D'Ignazio
• DOI: http://doi.org/10.1111/roie.12264
• Published date: 01 August 2017
• Date: 01 August 2017

Bank Internationalization and Firm Exports:

Evidence from Matched Firm–Bank Data

Raffaello Bronzini and Alessio D’Ignazio*

Abstract

In this paper we investigate whether new exporter firms have a higher probability of starting to export to

the countries where their financing banks have already established their branches. The underlying mecha-

nism we hypothesize is basedon the transmission of foreign market knowledge from banks to firms, so as to

cut down information barriers to international trade. In those countries where such information is arguably

more precious to the firm, we find a significant positive relationship between a firm’s probability of begin-

ning to export to one market and the presence in the same market of a branch of the firm’s financing bank.

Coherently with the mechanism hypothesized, we find a stronger effect for closer firm–bank relationships

and when banks have established their branchesabroad over a longer time period.

1. Introduction

Since the late 2000s, the literature examining whether credit constraints affect firms’

internationalization has rapidly expanded.

1

The economic argument of these studies is

grounded in the new international trade theories with heterogeneous enterprises. Since

engaging in offshore activities implies large sunk costs, only better, more productive

firms are able to penetrate foreign markets through exports (Melitz, 2003; Bernard

et al., 2003). In such a framework, credit constraints hamper internationalization,

because they prevent enterprises from raising funds for financing fixed exporting costs.

Unlike financial constraints and internationalization, whether and how the charac-

teristics of bank–firm relationships affect a firm’s propensity to export has been studied

very little.

2

Our paper contributes t o this stream of research. We inve stigate whether

new exporter firms have a higher probability of starting to export to the countries

where their financing banks have already established their branches. The underlying

mechanism we hypothesize is based on the transmission of knowledge on foreign mar-

kets from banks to firms, so as to cut down information barriers to international trade.

Banks with branches abroad collect a wide stock of information over time on foreign

countries that can easily be transmitted to their customers through the usual informal

bank–firm contacts. Such a valuable flow of knowledge allows firms to reduce the fixed

* Bronzini: Bank of Italy, Economic Research Division, Rome Branch, Rome, Italy. E-mail: raffaello.

bronzini@bancaditalia.it. D’Ignazio: Bank of Italy, Directorate General for Economics, Statistics and

Research, Rome, Italy. E-mail: alessio.dignazio@bancaditalia.it. The authors wish to thank Giorgio

Albareto, Giorgia Barboni, Nicolas Berman, Matteo Bugamelli, Alberto Dalmazzo, Silvia Del Prete,

Banu Demir, Thierry Mayer, Tomasz Michalski, Gianmarco Ottaviano, Andrea Presbitero, Massimo

Sbracia, Rafael Schiozer, Alessandra Staderini, Chiara Tomasi and two anonymous referees for their val-

uable comments and suggestions as well as participants at the 2015 XX DEGIT Conference, the 2015

Annual MFA Conference, the 2014 SIE Conference, the 2013 ERSA Congress, University of Siena and

Bank of Italy Seminars. The usual disclaimer applies. This paper was produced within European Firms

in a Global Economy: Internal policies for External Competitiveness (EFIGE), a collaborative project

funded by the European Commission Seventh Framework Programme (Contract No. 225551). The views

expressed herein are those of the authors and do not necessarily reflect those of the Bank of Italy.

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C2016 John Wiley & Sons Ltd

Review of International Economics, 25(3), 476–499, 2017

DOI:10.1111/roie.12264

start-up costs associated with entering a new foreign market. This intangible asset

turns out to be particularly helpful for small and medium enterprises that are less

equipped to start international business. Such an activity is even more valuable if the

relevant entry costs are specific to each destination country, as theoretically postulated

by Chaney (2016) and Eaton et al. (2011), and empirically shown by Moxnes (2010).

There is anecdotal and survey-based evidence that shows both the relevance of

informational barriers to firm internationalization and the role played by the banks in

helping enterprises to internationalize. For example, information barriers on foreign

countries are deemed the main obstacle to internationalization by a representative

sample of Italian firms interviewed by the Bank of Italy (Bank of Italy, 2011). More-

over, we know that the largest banks offer a wide range of non-financial services to

support small- and medium-size firm internationalization, which range from helping

enterprises to find profitable off-shore markets and suitable foreign clients, to consult-

ing facilities on foreign legal systems or institutional frameworks. According to Bartoli

et al. (2011) such non-financial services give considerable support to the international

activity of enterprises.

This paper provides an in-depth analysis of such issues. We take advantage of

detailed matched firm–bank data that provide information on firm exports by destina-

tion country as well as on firm–bank relationships. In particular, we know the destina-

tion country of firm exports and if a firm has ever exported there before. Moreover,

we are able to link firm information with the characteristics of their financing banks.

Namely, we know if and where banks’ financing firms have branches abroad. As a

result, we can regress a firm’s probability of exporting for the first time to one country

on the presence of its financing banks in the same country, controlling for country

fixed effects and a large set of other variables at firm level.

The relevance of the information on foreign markets provided by banks is likely to

be different across countries. We envisage that information barriers and therefore

entry costs will be higher in less market-oriented and less efficient countries, where

firms face a wide range of legal, regulatory and cultural constraints, and the market is

less accessible because of bureaucracy, institutional factors, or public administration

inefficiency. This set of obstacles is country-specific and might show a large heteroge-

neity across countries (World Bank, 2014) which we exploited in the econometric anal-

ysis. We presume that the internationalization of banks is more important for firms

wishing to export to markets where such obstacles are larger.

We find a significant positive relationship between a firm’s probability of starting to

export to one market and the presence, in the same market, of a branch of the financ-

ing bank, which is robust to several sensitivity tests. Coherently with the mechanism

hypothesized, this result applies to those countries characterized by higher information

barriers. Moreover, we find a stronger effect for closer firm–bank relationships and

when banks have established their branches abroad over longer time periods.

The link between the destination country of exports and the country where the

financing banks have branches might also be due to reasons other than the transmis-

sion of information from banks to firms. An alternative explanation is linked to the

role of trade finance instruments. Such instruments, as letters of credit, are widely

used in international trade and can certainly play a role in shaping firms’ decisions to

export in a certain country. Our empirical findings are consistent with the assumption

that the information transmitted by banks helps firms to start exporting, especially in

the less accessible countries. This is our preferred mechanism to interpret the empiri-

cal results. However, we cannot rule out that the link between bank internationaliza-

tion and firm export can be due to the trade finance channel, i.e. internationalized

BANK INTERNATIONALIZATION AND FIRM EXPORTS 477

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