Payment choice in international trade: Theory and evidence from cross‐country firm‐level data

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. When trading, firms choose between different payment contracts. As shown theoretically in Schmidt-Eisenlohr (forthcoming), this allows firms in international trade to optimally tradeoff differences in financing costs and enforcement across countries. This paper provides evidence from a large number of countries that shows that country characteristics are indeed central determinants of the payment contract choice. As predicted, the use of open account decreases in financing costs and contract enforcement in the source country. We extend the theory and test two additional predictions. First, we show that the more complex the industry of a firm, the more important is the quality of contract enforcement and the less important are the financing costs for the contract choice. Second, we compare direct and indirect exporters and find evidence that suggests that intermediaries play a relevant role in contract enforcement across borders. Terms of use: Documents inJEL-Code: F120, F300, G210, G320.

How firms export: Processing vs. ordinary trade with financial frictions

“…The impact of industries' inventory ratio on both trade shares is doubled for destinations with private-credit-to-GDP ratio above the median relative to countries below the median. This aligns with recent theoretical and empirical evidence that the relative cost of capital in the exporting and importing country affects the choice between cash-in-advance and post-shipment payment in international transactions (Antràs and Foley 2015, Demir and Javorcik 2014, Hoefele et al 2013).…”

International Trade, Multinational Activity, and Corporate Finance

“…Exploiting product-level data for Turkey in 2004, Demir & Javorcik (2014 conclude that higher institutional quality, cheaper capital, and tougher market competition in the importing country increase the incidence of postshipment payment. Conversely, open-account use falls when financing costs are lower and contract enforcement is stronger in the exporting country, as Hoefele et al (2013) find in firm-level surveys for 53 countries. This aligns with evidence in Manova & Yu (2012) that Chinese processing exporters, rather than foreign buyers, more frequently pay for foreign inputs when based in financially more developed provinces but pay less often when selling to financially more developed countries.…”

No guarantees, no trade: How banks affect export patterns

“…However, letters of credit are special in their ability to reduce risk in international trade and potential substitutes are imperfect. 4 Antràs and Foley (forthcoming), for example, show that letters of credit are key for the creation of new trade relationships, and Schmidt-Eisenlohr (2013) shows theoretically that switching to alternative payment forms may be very costly. This paper exploits a unique dataset available at the Federal Reserve to show that reductions in the supply of letters of credit by banks have causal effects on U.S. exports.…”