Credit Constraint Exports in Countries with Different Degrees of Contract Enforcement

Abstract

We theoretically consider firms’ export decisions in a heterogeneous firm framework. The paper assumes firms have idiosyncratic productivity levels and are credit-constrained in the export market. Firms in different countries have different degrees of credit constraints. Because of imperfect financial markets, firms might not be able to get the financial support to export even although they are profitable enough from the foreign market. In a country with strong contract enforcement, firms are more likely to export and export to more destinations; while in a country with weak contract enforcement, firms are more likely to be constrained by liquidity and export to fewer destinations. However, for those firms whose productivity is very low or very high, these influences do not exist. Moreover, we consider technology shocks and illustrate that technology shocks will further impede firms’ export decisions.