Credit Constraints, Export Mode and Firm Performance: An Investigation of China's Private Enterprises

• Date: 01 February 2017
• Author: Faqin Lin
• DOI: http://doi.org/10.1111/1468-0106.12207
• Published date: 01 February 2017

CREDIT CONSTRAINTS, EXPORT MODE AND FIRM

PERFORMANCE: AN INVESTIGATION OF CHINA’S

PRIVATE ENTERPRISES

FAQIN LIN*Central University of Finance and Economics

Abstract. Firms can export either directly or through a trade intermediary (indirect exporting). This

paper examines how financial constraints determine whether firms export directly or indirectly,

and how this choice affects firm performance. For this investigation, we use the most recent

Chinese private firm-level data, collected in 2011 by the World Bank. We establish two main

results. First, indirect exporters face higher financial constraints than direct exporters. Second,

indirect exporters are less productive and profitable than direct exporters. In addition, we

rationalize these patterns with a simple model that incorporates credit constraints and imperfect

contractibility in companies’export decisions. Our results imply that although globalization allows

more firms in developing countries to enter the global market through indirect exporting, limited

access to capital restricts firms to exporting directly and precludes them from pursuing more

profitable opportunities.

1. INTRODUCTION

The rapid multilateral, regional, bilateral and unilateral trade liberalization

process has dramatically increased international trade flows.1Trade

economists are acutely attentive to trade barriers, while previously they focused

almost exclusively on tariffs and non-tariff barriers specifically, or on the

transportation costs associated with physically moving products to international

market. Recently, significant attention has been afforded to firms choosing

to access international markets by exporting indirectly (Ahn et al., 2011;

Antras and Costinot, 2011; Blanchard et al., 2013; McCann, 2013; Head

et al., 2014). This has, in turn, contributed to a rise in multinational activity

and cross-border linkages. For instance, Ahn et al. (2011) show that today

for China, the largest exporter in the world, 22% of exports are handled by

Chinese intermediaries.

*Address for Correspondence: School of International Trade and Economics, Central University of

Finance and Economics (CUFE), 39 South College Road, Haidian District, Beijing, P.R. China,

100081. E-mail: linfaqin@126.com. I am grateful to the Editor, Professor Raouf Boucekkine, and

two anonymous referees for their invaluable comments that helped to improve this paper. This work

was supported by the National Natural Science Foundation of China (71503281), the Program for

Innovation Research in Central University of Finance and Economics and the Young Elite Teacher

Project of Central University of Finance and Economics.

1One example is China’s opening-up policy after 1978 and World Trade Organization (WTO) ac-

cession in 2001, and there are many papers discussing the effect of such trade liberalization policies.

For instance, Li et al. (2005) investigates the economic growth and performance of the Special Eco-

nomic Zone in China. Chow (2006) studies the implications of globalization for China’s economic

development since 1978. Ching et al. (2011) evaluate the impact of China’s accession to the WTO

on China’s economic growth.

Pacific Economic Review, 22: 1 (2017) pp. 123–143

doi: 10.1111/1468-0106.12207

© 2017 John Wiley & Sons Australia, Ltd

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However, the existence of such indirect exporting activity has been ignored

in previous micro-level research, both empirically and theoretically. These

studies have uncovered that only a fraction of firms export directly and that

exporters outperform non-exporters (Bernard and Jensen, 1995; Bernard

et al., 2009). This fact is now well-grounded in theoretical studies featuring

firm heterogeneity and fixed export costs (Melitz, 2003). However, if indirect

exports are ignored, these results (i.e. that exporters outperform non-exporters)

may be highly misleading. In addition to the attention now being paid to

indirect exports and trade intermediaries, the literature has begun to link the

market frictions that may arise from agency problems (e.g. financial friction)

to exports (e.g. Chesnokova, 2007; Manova, 2008, 2013a; Chor and Manova,

2012; Feenstra et al., 2014).

The present paper joins this small but rapidly growing literature in

arguing the importance of financial constraints in determining firms’

decision to use the indirect export mode. We use Chinese most recent

private firm-level data, collected in 2011 by the World Bank, to examine

how financial constraints determine firms’choice of export mode (direct

or indirect) and how the export mode choice affects firms’performance.

We find that due to credit constraints, some firms are forced to export

indirectly; thus, generally, indirect exporters face higher financial constraints

than direct exporters. We also determine that indirect exporters are less

productive and profitable than direct exporters. In addition, we attempt

to formalize the mechanisms at stake by using a simple theory based on

Manova and Yu (2013b). We emphasize the key role of financial

constraints in determining the trade mode and how the different trade

mode impacts firm performance.

The paper most related to ours is Manova and Yu (2013b), who examine how

financial constraints determine companies’position in global supply chains, and

how this affects profitability. They find that profits, profitability and value added

fall as exporters orient sales from ordinary towards processing trade, and

from import-and-assembly towards pure assembly. Second, less financially

constrained firms perform more ordinary trade relative to processing trade,

and more import-and-assembly relative to pure assembly. In contrast, the

present paper focuses on indirect exporters but not processing exports, because

we are studying China’s private firms. Although indirect exporters may also be

processing exporters, the processing takes place mostly in foreign invested

enterprises (more than 80%); see, for example, Feenstra and Wei (2010) and

Koopman et al. (2012). In China’s private firms, indirect exporters are not

necessarily processing exporters.

According to Blanchard et al. (2013) there are basically two kinds of trade

intermediation: ‘simple wholesaling’and ‘transformative trade’intermedia-

tion, whereby the exported product is fundamentally changed by the process

of intermediation. This process is referred to as ‘brand equity’in the

marketing literature. Processing exports might represent one example of

‘brand equity’(e.g. the iPhone being produced through the global value

chain. While indirect exporters of Chinese private firms are usually

F. LIN124

© 2017 John Wiley & Sons Australia, Ltd