Heterogeneous Enterprise, Financing Constraint And Export Trade Choice

The development of the global supply chain allows firms in developing countries to share the gains from trade by either engage in ordinary trade or in processing trade. Compared with ordinary trade, processing trade has a comparatively lower entry requirement for firms, making a lot of firms that could not have participated international trade play a role in global supply chain. As one of the major trade regimes in China, processing trade contributes a lot to the development of the economy. This leads a question for local exporters when they decide to participate in exporting:which trade regime should they choose:the ordinary trade or processing trade? Luckily, the New-new trade theory, which was born in the beginning of the21st century and is based on the firm’s productivity heterogeneity, aims to answer the similar question:why firm exports and which firms are exporting? Thus, the New-new trade theory provides a perfect theoretical framework for this study.Based on Heterogeneous Firms Theory, this paper examines how firm productivity heterogeneity and credit constraints affect Chinese firms’choice of trade regime. By exploiting matched customs and balance sheet data from the Customs Database and Annual Surveys of Industrial Firms (2006) in Logit and Probit model, this study establishes four main results. First, firms with lower productivity tend to perform more processing trade, while the ones with higher productivity prefer ordinary trade, which generates more profit. Second, credit constraints from financial intermediaries and non-formal trade credit constraints also have impacts on firms’ decisions, while the influence from the former is greater. Last, compared with State-owned Enterprises and Foreign Invested Enterprises, Private firms face the largest financial constraints, while the SOEs’ trade regime decisions are not significantly influenced by productivity or credit constraints. The results also imply that limited access to capital restricts firms to low value-added stages of global supply chain and it is there for of great importance to reform the financial sector and to establish a good business environment.