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

Manova, Kalina; Yu, Zhihong

Authors

Kalina Manova manova@stanford.edu

ZHIHONG YU ZHIHONG.YU@NOTTINGHAM.AC.UK
Associate Professor



Abstract

The fragmentation of production across borders allows firms to make and export final goods, or to perform only intermediate stages of production by processing imported inputs for re-exporting. We examine how financial frictions affect companies' choice between processing and ordinary trade – implicitly a choice of production technology and position in global supply chains – and how this decision affects performance. We exploit matched customs and balance sheet data from China, where exports are classified as ordinary trade, import-and-assembly processing trade (processing firm sources and pays for imported inputs), and pure assembly processing trade (processing firm receives foreign inputs for free). Value added, profits, and profitability rise from pure assembly to processing with imports to ordinary trade. However, more profitable trade regimes require more working capital because they entail higher up-front costs. As a result, credit constraints induce firms to conduct more processing trade and pure assembly in particular and preclude them from pursuing higher value-added, more profitable activities. Financial market imperfections thus impact the organization of production across firms and countries and inform optimal trade and development policy in the presence of global production networks.

Citation

Manova, K., & Yu, Z. (2016). How firms export: processing vs. ordinary trade with financial frictions. Journal of International Economics, 100, https://doi.org/10.1016/j.jinteco.2016.02.005

Journal Article Type Article
Acceptance Date Feb 24, 2016
Online Publication Date Mar 3, 2016
Publication Date May 1, 2016
Deposit Date Jul 5, 2016
Publicly Available Date Jul 5, 2016
Journal Journal of International Economics
Print ISSN 0022-1996
Electronic ISSN 0022-1996
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 100
DOI https://doi.org/10.1016/j.jinteco.2016.02.005
Keywords China, Trade Regime, Processing Trade, Global Value Chain, Credit Constraints, Heterogeneous Firms
Public URL http://eprints.nottingham.ac.uk/id/eprint/34409
Publisher URL http://www.sciencedirect.com/science/article/pii/S0022199616300198
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0

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TradeRegimes JIE second resubmission.pdf (478 Kb)
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Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0





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