Finance and International Trade: A Review of the Literature

Abstract

The aim of this paper is to review the literature on the link between finance and international trade. First, export performance is shown to strongly depend on sectors' or firms' external finance dependence. More vulnerable firms or sectors export less than others. Moreover, insufficient financial development and financial crises harm exports to a greater extent when firms or sectors are dependent on external finance. Second, trade finance plays a key role in financing trade and provides a powerful transmission channel for financial shocks, which affect international trade to a greater extent than domestic activities. Moreover there is a reciprocal causality between trade and finance. Finally, financial reforms and trade liberalization appear to be complementary, indicating that trade openness reforms are more effective in promoting GDP growth when financial systems are well developed.

Does Financial Development Enhance Foreign Trade in Selected Transitional Economies?

“…Consistent with this stance, the results from Berman and Héricourt's ( 2010) study on the effects of financial characteristics on export levels proves the insignificant impact of the leverage ratio, the liquidity ratio, and collateralizable assets on the quantity of exports. Overall, the empirical evidence supports the theoretical literature that a financial crisis intensifies the negative effects of financial constraints on foreign trade (Vaubourg 2016).…”

“…The first theoretical underpinning that explains the channel through which finance impacts foreign trade is trade finance theory (Vaubourg 2016). Firms involved in foreign trade have a choice among a variety of trade finance options, which include open accounts, cash in advance, letters of credit, and export credit guarantees.…”

“…When a firm expands its operations to serve foreign markets, it requires more capital to cover upfront costs like research and development, customizing the product, and establishing distribution channels (Baldwin and Krugman 1989). Inevitably, exporting firms resort to external finance to cover the gap (Vaubourg 2016). Imperfections in capital markets delay firms' decisions to go international.…”

Determinants of Current Account in Cases of Serbia and Romania: Time-Varying Parameters Approach

“…The findings showed that firms who had better access to any finance were more likely to export and exported more. Vaubourg (2016) provided extensive review of the literature on the links between finance and international trade and found that sectors' or firms' external financial dependence appears to be a key determinant of export performance. Hence, contemporary literature from all over the globe covering large samples of different countries point out various current account determinants of a country with different nature of the relationship between current account of a country and its determinants.…”

Financial Frictions and International Trade

“…Similarly, while we discuss related empirical work, this discussion in not exhaustive as our primary focus is on quantitative studies that investigate the impact of financial frictions using equilibrium models with heterogeneous firms. Manova (2010), Contessi and De Nicola (2012), Foley and Manova (2015), and Vaubourg (2016) provide complementary coverage of the related empirical literature.…”