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Do Financial Constraints Matter for Foreign Market Entry? A Firm-level Examination


  • The author would like to thank Dirk Engel, Christoph M. Schmidt, Michaela Trax, an anonymous referee as well as participants of the DRUID summer conference 2008, Copenhagen, the 35th conference of the EARIE, Toulouse and the annual meeting of the Verein für Socialpolitik 2008, Graz, for helpful comments and suggestions.


Recent theoretical and empirical contributions stress the importance of financial development for international trade. This paper investigates whether financial constraints matter for foreign market entry at the firm level using dynamic panel data techniques. Dynamic Probit and Tobit models that account for state dependence and unobserved heterogeneity are used to analyse the effect of financial indicators on export activities. The empirical framework tests for heterogeneous effects among different quartiles of the size and productivity distribution, across previous exporters and potential starters, and across different types of industries as those are predicted by theoretical models. The empirical analysis is applied to a large panel dataset of French manufacturing firms over the years 1998–2005. The data contain a high share of small firms that are usually the most likely to be financially constrained. Although financial indicators are significantly correlated with export status and export share, there is no evidence that financial constraints have a direct impact on foreign market participation or sales in foreign markets once observed and unobserved firm heterogeneity is controlled for. This result is robust to using alternative estimation techniques and also holds for subgroups of firms that are more likely to face financial constraints and industries that are more dependent on financial factors.