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Effects of Financial Market Imperfections on Indian Firms' Exporting Behavior

Author

Listed:
  • Ito, Hiro

    (Asian Development Bank)

  • Terada-Hagiwara, Akiko

    (Asian Development Bank)

Abstract

Using data from more than 6,000 manufacturing firms in India for 1996–2008, we investigate the impact of financial constraints on the exporting behavior of Indian manufacturing firms while also focusing on the link between exchange rate movement and exports. We find that there is a strong degree of persistency in the exporting behavior of Indian manufacturing firms, reflecting the high fixed costs of entering foreign markets for Indian firms. A firm with a higher amount of net cash flows and smaller debt-to-asset ratios is more likely to become an exporter, indicating that a firm tends to self-finance its exporting without relying too much on external finances. Internal funds are especially important for firms that are not incumbent exporters to become exporters, and also for firms that do not enjoy technical advancement and high levels of productivity. When we divide the sample period into several subperiods, Indian firms have become less reliant on internal cash in recent years, but new exporters still rely on cash holdings to enter foreign markets. Over all, recent financial liberalization in India still does not allow the financial system to meet the stronger demand for funds by firms, especially small ones, though part of the stronger demand for funds are increasingly met by funds provided by foreign institutions. Based on our findings, improving the functionality of financial markets is an urgent issue to remove financial constraints that hinder Indian firms from entering export markets.

Suggested Citation

  • Ito, Hiro & Terada-Hagiwara, Akiko, 2011. "Effects of Financial Market Imperfections on Indian Firms' Exporting Behavior," ADB Economics Working Paper Series 256, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0256
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    Citations

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    Cited by:

    1. Joachim Wagner, 2014. "Credit constraints and exports: evidence for German manufacturing enterprises," Applied Economics, Taylor & Francis Journals, vol. 46(3), pages 294-302, January.
    2. Deniz Baglan & Hakan Yilmazkuday, 2018. "Financial Health and the Intensive Margin of Trade," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(6), pages 1304-1319, May.
    3. Juan A. Máñez & María E. Rochina-Barrachina & Juan A. Sanchis-Llopis & Oscar Vicente, 2013. "Financial constraints and Spanish manufacturing firms’ R&D and exporting," Working Papers 1324, Department of Applied Economics II, Universidad de Valencia.
    4. Joachim Wagner, 2016. "Credit Constraints and Exports: A Survey of Empirical Studies Using Firm Level Data," World Scientific Book Chapters, in: Microeconometrics of International Trade, chapter 12, pages 401-421, World Scientific Publishing Co. Pte. Ltd..
    5. Prakash Singh & Dibyendu Maiti, 2019. "Sources of Finance, Innovation and Exportability in Asia: Cross-country Evidences," Journal of Asian Economic Integration, , vol. 1(1), pages 73-96, April.

    More about this item

    Keywords

    India; firm-level analysis; hysteresis hypothesis; financial constraint; market imperfection;
    All these keywords.

    JEL classification:

    • F19 - International Economics - - Trade - - - Other
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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