Working Paper: CEPR ID: DP10142
Authors: Banu Demir; Beata Javorcik
Abstract: The literature has documented how firms adjust to increased competitive pressures arising from globalization. This paper demonstrates a new margin of adjustment, namely, provision of trade credit. A simple model predicts that an increase in competitive pressures will lead exporters to provide trade credit and lower prices and that the price adjustment will be attenuated by trade credit provision. These predictions are tested in the context of an exogenous shock, the end of the Multi-Fiber Arrangement (MFA), a quota system governing trade in textiles and clothing until the end-2004. The analysis focuses on Turkey which was not subject to quotas in the EU and thus faced an increase in competition after the quotas on China had been removed. The results suggest that in the post-MFA period Turkish exports of products with binding MFA quotas prior to the shock saw an increase in the provision of trade credit and a drop in prices relative to the other products. There is also evidence that provision of trade credit generated a dampening effect on the price response to the increase in competition.
Keywords: trade credit; export financing; competition; Multifiber Arrangement; Turkey
JEL Codes: F13; F14; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| MFA quota removal (F13) | increase in competitive pressures (L19) |
| increase in competitive pressures (L19) | increase in trade credit provision for Turkish exporters (F19) |
| increase in competitive pressures (L19) | larger decline in prices for affected products (L11) |
| provision of trade credit (L14) | dampening effect on price response to increased competition (L11) |