Financial Constraints and Export Participation: A Case Study of Indian Textile Industry

Domestic firms that decide to enter the foreign markets face various non-recoverable fixed costs in acquiring knowledge about target markets, setting up new marketing and distribution channels and customising their products according to foreign demand patterns. Hence, only firms which are in a financially healthy position can pay for the considerable upfront costs associated with foreign market entry. Firms which are constrained by the lack of availability of internal finance can raise external capital, the probability and amount of which, however, depends on several firm-specific factors. The present study takes the example of the Indian textile industry, one of the major export-oriented industries in the country, to provide micro-level evidence of the impact of financial factors on export participation. Using extensive firm-level data, the study finds that financial factors have a significant impact on the extensive margin of exports but not on the intensive margin. The findings of the study make a compelling case for government intervention in supporting the entry of the domestic textile firms into foreign markets by enhancing their access to external capital.