Research

Abstract: This paper investigates the effects of local financial development on firms' internationalization in the presence of a heterogeneous banking sector. Using firm-level data from Italy, we document that, when driven by banks with a local focus, financial development boosts export participation but can depress the export sales of incumbent exporters. We explain these patterns through an industry equilibrium model of international trade with heterogeneous firms and banks. Local financial deepening enhances banks' ability to monitor domestic and export activities, boosting the entry of credit rationed firms into export, but induces credit-satiated exporters to partly redirect their production capacity to domestic markets. Calibrating the model to match the data reveals that increased domestic output and export participation can come at the cost of reduced aggregate exports.

The figure at right plots the distribution of firm-level foreign sales elasticities with respect to a 1% increase in localistic (i.e., locally or domestically-focused) banking access over (x) firm-level labor productivity and (y) average external financial constraints (ex ante of banking shock). Please note that this graphic is representative of only those firms that export before and after the banking shock. We see that foreign sales response is strongest (color-coded red) for export firms with lower productivity/higher external financial constraints. As firms become more productive/less financially constrained (moving right/down), the foreign sales response weakens until it switches sign (color-coded deep blue).

The story: increased credit provision by lenders specialized in local activity creates competing substitution and income effects for export firms. For highly financially constrained firms, the income effect dominates; even though the lender specializes in domestic production, the increased credit access nevertheless improves foreign production. For firms with low financial constraints - who unlike financially constrained exporters, do not lack for pledgeable income - the substitution effect dominates as cheaper financing costs for domestic activity improve the relative returns to domestic production

Data note: These simulation results are generated from a model of international trade with credit constraints with both heterogeneous firms and lenders, calibrated to Italian microdata on manufacturing firms and bank branch access by province from 1997.

Works in Progress

"Multinational Banking & Trade Flows in the Global Economy" with Hannah Gabriel

"Financial Development, Credit Reallocation, & Industry Dynamics" with C. Luke Watson

"Global Value Chain Participation and Bank Lending Decisions" with Raoul Minetti

"Export Participation and Supplier Credit Access"