Working Paper: NBER ID: w18867
Authors: Man Lung Chan; Kalina Manova
Abstract: What determines the choice of countries' trade partners? We show theoretically and empirically that financial market imperfections affect the number and identity of exporters' destinations. Bigger economies with lower trade costs are more attractive markets because they offer higher export profits. This generates a pecking order of destinations such that firms serve all countries above a cut-off level of market potential. Credit constraints, however, raise this cut-off above the first best. Financially advanced nations thus have more trade partners and go further down the pecking order, especially in sectors that rely heavily on the financial system. Our results provide new, systematic evidence that countries follow a hierarchy of export destinations, that market size and trade costs determine this hierarchy, and that financial frictions interact importantly with it. This has policy implications for the effects of cross-border linkages that depend on the number and identity of countries' trade partners.
Keywords: Financial Development; Trade Partners; Export Destinations; Credit Constraints
JEL Codes: F10; F14; F36; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial development (O16) | choice of trade partners (F10) |
| financial development (O16) | number of trade partners (F10) |
| financial development (O16) | market potential of least attractive destination served (Z30) |
| financial constraints (H60) | cutoff level of market potential (C24) |
| financial frictions (G19) | access to less profitable markets (F61) |
| financial development (O16) | export destinations (F10) |
| financial development (O16) | hierarchy of export destinations (F10) |