Imports and Credit Rationing: A Firm-Level Investigation

Abstract

Firm performance is known to benefit from participation in import markets. For this reason, understanding whether credit constraints hamper firms’ ability to purchase foreign inputs is a relevant issue. In this paper, we investigate the relationship between financial constraints and imports of intermediate inputs using a large sample of small- and medium-sized enterprises from 66 developing countries. To measure credit constraints we use information from a firm’s in-depth self-assessment of its difficulties in having access to external finance. Furthermore, to tackle the endogeneity problems in the estimation, we rely on an instrumental variable approach that allows us to establish more directly the impact of financial constraints on importing activities. We provide robust evidence of a statistically and economically significant restraining effect of credit constraints on both the probability of importing intermediates (the extensive margin) and the incidence of imported intermediates in total input expenditure (the intensive margin). Moreover, we show that the impact on these margins of import is stronger for firms operating in countries where the financial system is less developed, the quality of institutions poorer and the overall level of economic freedom lower.