International trade declined dramatically during the Global Crisis (WTO 2012). Economists have offered various explanations for this (see Baldwin 2009):
- A strong fall in demand.
- A rise in protectionism.
- A domino effect because of global value chains.
- A drop in trade finance.
Studies based on firm level data, such as Bricogne et al. (2012), generally conclude that most of the changes in export performance during the crisis are due to adjustments at the intensive margin, i.e., firms remain in their export markets but adjust the quantity of exports. Using data for French firms, they show that adjustment along the intensive margin accounted for 79% of the reduction in exports. Only 21% were due to adjustments at the extensive margin, i.e., through firms exiting from the export market.
Yet, adjustments along the external margin may have severe prolonged consequences for a country's export performance. Given that there are substantial sunk costs for (re-)entering export markets, firms exiting from the export market during the crisis are unlikely to re-enter again immediately after the negative shock disappears. This is what Baldwin (1990) termed “hysteresis” in exports.
If hysteresis is important (and empirical estimates of sunk costs of exporting, such as by Das et al. (2007), suggest that it is), then the exit triggered by the crisis may lead to a permanent reduction of the number of exporters in a country even after the crisis. As a result, export activity may become more concentrated among a smaller number of firms.
This has potentially important policy implications for countries engaged in promoting export performance. The British Government agency UK Trade & Investment, for example, appears to have a strong focus on assisting firms to start exporting, i.e., increase the number of firms exporting rather than just the overall quantity of exports.
One important factor that might be held accountable for the decrease in the number of exporters is a worsening of access to external finance. As Amiti and Weinstein (2011) discuss, exports are highly dependent on access to finance, much more so than domestic operations of firms. Hence, a lack of finance may also cause firms to exit the market.
Access to finance
Corporate funding (or the lack thereof) has been a major concern for policymakers during the recent financial crisis. In the UK, business lending, which has been falling steadily for the last four years, plunged below 400 billion pounds by the beginning of May 2013. That is 20% below its level four years ago. Participants in the Funding for Lending Scheme group, which includes all of the big high-street banks except HSBC, cut credit by 300m in the first quarter of 2013 (Economist 2013). Also, Bell and Young (2010) find evidence of a substantial tightening in credit supply from mid-2007. They argue that loan spreads on small- to medium-sized enterprises rose during the crisis period, with syndicated loans presenting a sharp increase from mid-2008.
Thus, the cost of bank finance varies amongst firms leading to a heterogeneous firm-specific interest rate. A high borrowing ratio (or firm-specific interest rate) can be seen as evidence that the firm is charged a high external finance premium. Figure 1 compares the average firm-specific interest rate paid by heterogeneous firms between 2000 and 2009. More bank-dependent firms are faced with a higher borrowing ratio compared to their less bank-dependent counterparts. Hence, during crisis periods the worsening of the balance sheet position of firms and the rise in debt servicing costs might be associated with higher chances of firm exit from the export market.
Figure 1. Borrowing ration for more or less bank-dependent firms
In our paper (Görg and Spaliara 2013) we focus on the extensive margin of exports and investigate firms' exit from the export market. Specifically, we investigate whether such exit has increased during the crisis, whether a firm's financial position can explain firm export exit, and whether the importance of financial health was more pronounced during the crisis. Moreover, we attempt to gauge the effect of the firm-specific interest rate on export exit during the crisis when loan spreads increased.
The analysis is conducted using firm-level data from the FAME dataset for the UK, covering the period 2000 to 2009. We estimate hazard functions of firms’ exit from the export market conditional on a set of covariates at the firm level. The most important explanatory variables for our analysis are firm-level measures of access to finance – leverage, liquidity, and the borrowing ratio as a measure of the firm-specific interest rate.
- Our data clearly show that firms that exit from the export market are more heavily indebted and less liquid than firms that stay in the export market.
- They also face a higher firm-specific interest rate.
We also find that leverage and the firm-specific interest are higher during the crisis, while liquidity is lower across all firms.
In the empirical model of firm exit from the export market we find that export-market exit has indeed increased during the crisis, even when controlling for other firm-level determinants of export failure. We also show that the impact of access to finance on the hazard of export-market exit is exacerbated during the crisis.
In general, changes in the financial status of the firm have a much stronger impact on the risk of export failure during the recent financial crisis than before.
- Most importantly, we find that increases in debt servicing costs positively affect the likelihood of export exit during the crisis.
- Firms facing high interest payment obligations are more likely to exit the export market during 2007-09 compared to firms with lower interest payments.
An increase in the number of firms dropping out of export markets during the crisis should be of concern to policymakers. These firms are unlikely to simply re-enter export markets after the crisis, since sunk costs are important for export decisions. Instead, they may behave just like first time exporters, relying on the same export promotion policies as firms that have never exported before.
Amiti, M and D Weinstein (2011), “Exports and Financial Shocks”, Quarterly Journal of Economics 126, 1841-1877.
Baldwin, R (1990), “Hysteresis in trade”, Empirical Economics 15, 134-146.
Baldwin, R and S Evenett (2009), “The collapse of global trade, murky protectionism, and the crisis. Recommendations for the G20”, CEPR Working Paper.
Baldwin, R (2009), The Great Trade Collapse: Causes, Consequences and Prospects, VoxEU.org, ebook, 27 November.
Bell, V and G Young (2010), “Understanding the weakness of bank lending”, Bank of England Quarterly Bulletin, Q4.
Bricongne, J, L Fontagné, G Gaulier, D Taglioni and V Vicard (2012), “Firms and the global crisis: French exports in the turmoil”, Journal of International Economics 87, 127-142.
Das, S, M Roberts and J Tybout (2007), “Market entry costs, producer heterogeneity, and export dynamics”, Econometrica, 75, 837-873.
Görg, H and M E Spaliara (2013), “Export market exit, financial pressure and the crisis”, CEPR Working Paper 9599.