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.
Highlights
There has been a strong emphasis on export promotion for economic development in the policy making community, especially in developing countries
This paper examined the supply-side factors affecting the exporting behavior of Indian firms while focusing on the role of financial conditions and exchange rate movement
Our estimation results suggest that the exchange rate, in terms of both its level and volatilities, plays only a limited role while financial conditions matter more for exporting behavior
Summary
There has been a strong emphasis on export promotion for economic development in the policy making community, especially in developing countries. We will empirically investigate the impact of financial constraints on the exporting behavior of Indian manufacturing firms and examine how these affect the link between exchange rate movement and exports. For the theoretical foundation for the estimation, we will follow Campa (2004) who examined the link between firms’ exporting behavior and the exchange rate movement using the firm-level data of Spanish manufacturing firms, but we will make an important modification by adding variables that reflect financial conditions facing Indian firms. As far as we are aware, only few studies have looked into the macroeconomic questions relevant to Indian firms despite wide use of the PROWESS database Both Bhaduri (2005) and Ghosh (2006) investigate the impact of financial liberalization and financial constraint on Indian firms, but focus on the investment supply function.
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