Financial constraints and export participation in India

Abstract

A firm making an entry decision into the export market faces various non-recoverable fixed costs. Financially constrained firms, unable to make this investment, cannot enter the export market. In this paper, I investigate this relation between financial constraints and the export market entry decision for manufacturing firms in India. Using multiple estimators, I find a strong correlation between the two. I find that firms entering the export market are financially healthier than non-exporting firms. I am also able to show that financial health is the cause and not an effect of exports. Further, the intensive margin of exports (increase in exports of continuing exporters) does not depend on the financial health of the firms. The extensive margin of exports (increase in exports due to new exporters) can be increased if financial constraints faced by firms are reduced. These results are important for the export promotion policies of a developing economy.