Liquidity Constraints and Firm's Export Activity

Abstract

This paper will assess the importance of internal rm resources in overcoming sunk entry costs associated with export. When rms are not able to raise additional external funds for investments, they are credit-constrained, and in such a case, new exporters have to rely on their internal liquidity to pay sunk costs. Using a data set of small and medium size Italian enterprises (SMEs), we nd that entry probability in the export market is aected by the level of cash stock for constrained rms. We propose a methodology used to identify a priori constrained rms, employing index analysis as used in business economics. The estimation of the Euler equation for investments conrms the tness of our classication. In addition we nd that exporters show higher liquidity if they raise the number of destinations. Finally, we do not nd evidence that entry in the export market improves rm’s nancial health, while ex-ante new entrants are found to be relatively more leveraged.