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2021 | OriginalPaper | Buchkapitel

4. Exports and Credit Constraints under Incomplete Information

verfasst von : Miaojie Yu

Erschienen in: Exchange Rate, Credit Constraints and China’s International Trade

Verlag: Springer Singapore

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Abstract

This chapter examines why credit constraints for domestic and exporting firms arise in a setting where banks do not observe firms’ productivities. To maintain incentive-compatibility, banks lend below the amount that firms would need for optimal production. The longer time needed for export shipments induces a tighter credit constraint on exporters than on purely domestic firms, even in the exporters’ home market. In our application to Chinese firms, we find that the credit constraint is more stringent as a firm’s export share grows, as the time to ship for exports is lengthened, and as there is greater dispersion of firms’ productivities reflecting more incomplete information.

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Vorheriges Kapitel Exports, Productivity, and Credit Constraints

Nächstes Kapitel Exchange Rate Movements and Exporter Profitability

Other papers dealing with trade and finance include Qiu (1999), Greenaway et al. (2007), Harrison and McMillan (2003), Muûls (2008), Buch et al. (2008), Héricourt and Poncet (2009), Poncet et al. (2009), and Egger and Keuschnigg (2011).

In our working paper (Feenstra et al. 2011), we also included the risk faced by exporters in international markets. But because that risk was taken as exogenous (in contrast to Ahn (2011), for example), it had little impact on the theory and could not be tested with our Chinese firm-level data, so that extension is omitted here. Berman et al. (2012a) also take the risk of default as exogenous but model it as depending on the time to ship, so that it plays an important role in their model and estimation.

Ahn (2011) provides an information-based model of trade finance.

The Appendix is available at http://www.econ.ucdavis.edu/faculty/fzfeens/papers.html.

Notice here we assume away risks. Including risks and collateral in the problem would not affect our main results, as shown in a more comprehensive version of the model in Feenstra et al. (2011).

We show in the Appendix that these monotonicity conditions hold in the optimal schedules for the bank.

We do not make explicit the transportation costs to the export market for expositional convenience, but that iceberg cost can readily be incorporated into the definition of the effective foreign expenditure on the differentiated good Y^∗. That is, including iceberg transport costs τ > 1, then export demand is \( {q}_e=\left({\tilde{Y}}^{\ast }/{P}^{\ast}\right){\left(\tau {p}_e/{P}^{\ast}\right)}^{-\sigma } \), which equals that shown in the export demand by defining \( {Y}^{\ast }={\tilde{Y}}^{\ast }{\tau}^{-\sigma } \).

We assume θ > 1 as is needed for the mean of the Pareto distribution to be finite.

Note that the troublesome term v_1jtu_jt appears twice in w_jt after the substitutions are made, but with opposite sign, so it cancels out. That occurs because, unlike Heckman and Vytlacil (1998), we start with an exact theoretical relation in (4est) and then add the errors. The term analogous to v_1jtu_jt did not vanish in Heckman and Vytlacil, so they had to make a conditional homoskedasticity assumption on it to ensure that it would not bias the estimation. That additional assumption is not needed here.

Like β₂ and β₃, there is still an approximation involved in β₄ by treating it as constant across firms. All these coefficients depend on the difference (τ_e − τ_d) in the time to receive payment for exporters and domestic firms. We will allow these coefficients to vary for sea exports versus non-sea exports in our later estimation.

In our working paper (Feenstra et al. 2011), we allowed the coefficient β₅ to vary over years as suggested by i_t, but because the results were not that robust, we omit them here. Also, in principle we should be using the expected value of \( {1}_{\left\{x\ge {\underset{\_}{x}}_e\right\}} \) conditional on Z_jt in the estimating (4.23), but in practice have found that using the indicator variable itself as a control results in more stable coefficients.

In addition, as explained below, while the first-step of the Tobit procedure uses the variables Z_jt including x_jt, the second step omits x_jt. We also need to assume that this exclusion restriction is correct.

Data in 2008, which is still not formally released and only available in a trial version, do not have information on firm’s ID. So we use other available common variables to merge with data on 2007 and obtain 336,480 observations, which is almost identical to the number of observations in 2007 (i.e., 336,768 firms).

Since smaller Chinese firms are more likely to be financially constrained, the effects of financial frictions estimated in the chapter may be underestimated. Our finding shall be interpreted as a minimum of the credit constraint faced by Chinese firms. We thank a referee for pointing this out.

For example, information on some family-based firms, which usually did not set up formal accounting systems, is based on a unit of one Renminbi, whereas the official requirement is a unit of 1000 Renminbi.

Levinsohn and Petrin (2003) suggest to include all Chilean plants with at least 10 workers, and we follow their criterion. Brandt et al. (2012) suggest dropping firms with less than eight employees as such firms fall in a different regime in China. We also experimented with such loose criteria to include more of the sample, but found that our estimation results were not significantly changed.

In particular, observations in which the opening year is after 2008 or the opening month is later than December or earlier than January are dropped.

There are 300,372 Chinese firms and 42,612 foreign firms (i.e., MNEs) in our sample for regressions.

Note that we use deflated firm’s value-added to measure production and exclude intermediate inputs (materials) as one kind of factor inputs. However, we are not able to use value-added to estimate firm’s TFP in 2008 since it is absent in the current trial version of the data set. We instead use industrial output to replace value-added in that year.

See the Appendix, Fig. A1.

Recall that the coefficients should satisfy condition Eq. (4.22): \( {\beta}_2\in \left(-\frac{1}{2}\left({\beta}_1+\sqrt{\beta_1^2+4{\beta}_1{\beta}_3}\right),0\right) \).

As in the finance literature, the common measure for firm’s access to collateral is the share of tangible assets in total assets instead of the level of tangible assets, due in large part to the fact that the latter is endogenous to the size of the firm and its revenue.

If there are many foreign markets, then more productive firms will export to more markets and therefore have higher export market shares. We interpret this result as saying that the selection equation becomes more complex with many foreign markets. For this reason, there will certainly be a correlation between the firms’ export share and firm-level indicators. But when we check the simple correlation between firms’ export share and TFP2 in the data, it is negligible (0.03) during 2000–2008.

This is consistent with our theoretical results shown in our working paper: having greater collateral will relax the cash flow constraint, especially for exporters.

Such a finding is different from Lu (2011) as pure exporters are excluded from our sample. Dai et al. (2012) find evidence that pure exporters are mostly processing firms in China. Once processing firms are excluded, China’s exports still follow the prediction of the Heckscher–Ohlin model.

There are in fact five steps to our estimation: (i) the preliminary regression of TFP1_jt on firm-level indicators, interactions between four-digit industry indicators and TFP2_jt, and other variables that appear on the right of Eq. (4.28); (ii) the selection Eq. (4.28) using \( {\overset{\frown }{TFP1}}_{jt} \); (iii) the second-step Heckman equation excluding \( {\overset{\frown }{TFP1}}_{jt} \), used to obtain predicted export shares \( {\hat{\eta}}_{ejt} \) and \( {\hat{\eta}}_{ejt}^2 \); (iv) the first-step of 2SLS where \( {I}_{jt},{I}_{jt}\eta {\hat{\mkern6mu}}_{ejt} \) and \( {I}_{jt}{\hat{\eta}}_{ejt}^2 \) are regressed on TFP2_jt, \( TFP{2}_{jt}{\hat{\eta}}_{ejt} \), and \( TFP{2}_{jt}{\hat{\eta}}_{ejt}^2 \), along with other variables on the right of Eq. (4.23); (v) the final estimation of Eq. (4.23). Panel bootstrapping by randomly drawing firms is done over all five steps, which thereby corrects for clustering by firms.

Also reported in Table 4.2 are several tests to check the validity of our instruments. We report the Kleibergen–Paap LM χ² statistic to test the null hypothesis that the model is under-identified, and the Anderson–Rubin Wald F statistic to test the null hypothesis of weak identification. Both hypotheses are strongly rejected at the 1% significance level. But since we have not attempted to correct the significant level of these tests for the use of estimated regressors, we interpret these results with caution.

The introduction of the success rate of projects ρ, and the default rate (1 − ρ) leads to a slightly different definition of the credit constraints \( {\overline{\varPhi}}_e \) and \( {\overline{\varPhi}}_d \). But the definitions of the coefficients in Eqs. (4.16) and (4.17) still hold: see Feenstra et al. (2011) for details.

As explained in note 19, the data for 2008 are a trial version, so that TFP cannot be computed in the same manner as for earlier years.

In addition, in Table 4.4 we exclude the Hong Kong/Macao/Taiwan-invested firms, since shipping by sea for those firms may involve only very short distances. Those firms are included again in Table 4.5.

Our estimation results are essentially unchanged if we take other proportion of sea shipment such as 75%, 90%, or 95%, to form the sea indicator. We have found, however, that if we try to distinguish air shipments as a separate category, then those results are not robust.

See the last column of Appendix Table A1.

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Titel: Exports and Credit Constraints under Incomplete Information
verfasst von: Miaojie Yu
Verlag: Springer Singapore
Buch: Exchange Rate, Credit Constraints and China’s International Trade
Print ISBN: 978-981-15-7521-1

Electronic ISBN: 978-981-15-7522-8

Copyright-Jahr: 2021
DOI: https://doi.org/10.1007/978-981-15-7522-8_4