The impact of credit constraint on exporting and innovation: Evidence from Ghana and Vietnam

This work examines the impact of credit constraint on firms' exporting and innovation decisions. On the theoretical front, this chapter contributes by extending the Melitz's (2003) trade model of firms heterogeneous in productivity, which is devoid of financial factors, to include endogenous lending and borrowing decisions. This extension creates a framework upon which theoretical predictions about the impact of credit constraint on firms' exporting and innovation decisions can be made.;I build a trade model that features (1) firms heterogeneous in productivity, liquidity, and collateral and (2) endogenous lending decisions with endogenous loan default and interest rate. Firms finance their fixed costs of exporting through internal financing from retained earnings and borrowing from banks. The model predicts that credit access has a positive impact on firms' export propensity, and that this effect is most pronounced for firms in the intermediate range of productivity. In the empirical application to a panel data set of Ghanaian firms between 1991 and 1997, I look at two types of access to bank credits: access to overdraft facilities and access to bank loans. My empirical estimation suggests that access to overdraft facilities increased firms' export propensity while access to bank loans had an insignificant impact on their export propensity. The effect of access to overdraft is strongest for firms in the intermediate range of productivity.;I also build a theoretical model of innovation for firms heterogeneous in productivity under endogenous lending decisions. In this model, credit constraint arises from the asymmetric information problem, where banks cannot observe a firm's true productivity. The longer time frame and higher risks of innovating result in tighter credit constraints for innovating firms. Thus, the theoretical model predicts a positive relationship between a firm's interest payment per worker and its revenue (profits) per worker. The model also predicts that innovating firms face tighter credit constraint than firms do not innovate, which is shown by a positive, but smaller in magnitude, relationship between innovating firms' interest payment per worker and their revenues (profits) per worker. Empirical evidence from a sample of Vietnamese small and medium enterprises supports these theoretical predictions.