When Does Finance Help Trade? Banking Structures and Export in the Macroeconomy

This paper investigates the effects of local nancial development on rms' internationalization in the presence of a heterogeneous banking sector. Using rm-level data from Italy, we document that, when driven by banks with a local focus, nancial development boosts export participation but can depress the export sales of incumbent exporters. We explain these patterns through an industry equilibrium model of international trade with heterogeneous rms and banks. Local nancial deepening enhances banks' ability to monitor domestic and export activities, easing the entry of credit rationed rms into export, but induces credit satiated exporters to partly redirect their production capacity to domestic markets. Calibrating the model to match the data reveals that, when nancial development is too local, increased domestic output and export participation can come at the cost of reduced aggregate exports.