Financial constraints and the export decision of Pakistani firms

Abstract

The payment of sunk costs associated with the entry to foreign export markets highlights the significance of financial dimension in the firm decision. The sunk costs become a challenge for the financially constrained firms. In this paper, we study the relationship between financial constraints and the export entry decision of the firms in a lower‐middle income country context. We use new measures of financial constraints in finance literature alongside widely used measures of financial health in trade literature to scrutinise the relationship for Pakistani listed manufacturing firms. We find that being less financially constrained is a vital determinant of the Pakistani firms' export participation decision irrespective the high firm leverage before entry. The undeveloped financial system and heavy reliance on bank loans for external finance in Pakistan may be the plausible explanations for our findings. Our results suggest that measures of financial constraints are more appropriate than the widely used measures of financial health in studying the determinants of the export participation decision. In addition, we find evidence that future exporters improve their financial conditions prior to entering the export markets. However, we do not find any evidence that exporting improves financial conditions of the firms after entry.

Export Decision and Formal Credit Constraints - Evidence in Vietnamese Small and Medium Enterprises

“…This supports 278 the theory that the export decision depends on both the cost of entering the market 279 and the firm's credit constraints in the previous period ([18]). However, the positive 280 coefficient of credit constraint is consistent with the point of view[14]. For firms in 281 developing countries where the capital market still has many shortcomings, the demand 282 for credit increased due to the demand for capital for export but the inability to find 283 external funding resulted in limited credit.…”

“…However, this study finds no connection between 2 years of 317 lagged credit constraints and discontinued export (p> 10%). In conclusion, the ability to 318 enter the international market is affected by the past credit situation of the enterprise 319 rather than the ability of the enterprise to stop exporting (the similar results with [14], 320 [18]).…”

What Matters for Corporate Cash Holdings Board Governance, Financial Constraints, or Interactions?

“…Despite the fact that there are different probable methods for measuring financial constraints, such as the WW index (Qasim et al, 2021), there is a debate on the merits of each of these methods. It is not unanticipated because every approach depends upon some empirical and/or theoretical supposition that may or may not be valid.…”

Open account, import decision and financial constraints: A cross‐country firm‐level study

“…A considerable amount of research effort has been directed toward the link between an open account and exports in the theoretical and empirical literature, demonstrating that an open account positively influences extensive and intensive export (Fisman & Love, 2003), especially in financially-constrained firms. The role of financial constraints is well-documented in the literature on export decisions (Bellone et al, 2010;Qasim et al, 2021), investment decisions (Buch et al, 2014;Danzman, 2020;Sasidharan & Padmaja, 2018), global value chain participation (Reddy & Sasidharan, 2021), R&D activities (Howell, 2016), and trade credit usage (Altaf, 2020;Baker et al, 2020). In this vein, an open account serves as a quality signal that assists in reducing financial constraints.…”