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...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2014/04/19404022/liquidity-matters-export-decision-firm http://hdl.handle.net/10986/18331 |
| Summary: | 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. |
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