We investigate how market uncertainty affects the export performance of a firm through financial frictions. We first extend Melitz's (2003) heterogeneous firm trade model by incorporating demand shocks, linking the demand uncertainties to the financing costs of firms. In this extension, the default probability is endogenously determined by a firm's productivity and demand uncertainty. Hence, firms with higher productivity or lower market uncertainty are offered lower interest rates and thus show better export performance. As an application, we also show that a risk-sharing mechanism, that pools default risk for a certain group of firms, lowers the default risk. This mechanism allows banks to charge lower interest rates to the member firms and therefore ultimately improves their export performance in both extensive and intensive margins. We find a real-world example of such a mechanism from business groups in Korea. Using Korean firm-level data, we show that the more diversified the business group, the greater the likelihood that its member firms export and the bigger their export revenues. We also show that our results are robust to alternative explanations for Korean business groups’ export competitiveness.
Bibliographical noteFunding Information:
Seung Hoon Lee is deeply indebted to Kyle Bagwell, Kalina Manova and Christopher Tonetti for their invaluable advice and also thanks Alwyn Young, Dave Donaldson, Sanghoon Lee, Jackie Chan and seminar participants at Stanford University. Byongju Lee is grateful for the dedicated work of research assistant Hyunsang Jang and thanks discussants at the seminar at the Bank of Korea, Jung Hur and Kwang-Myoung Hwang. This research was financially supported by the Bank of Korea.
© 2020 Canadian Economics Association
All Science Journal Classification (ASJC) codes
- Economics and Econometrics