NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Publications by Man Lung Chan

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March 2013Financial Development and the Choice of Trade Partners
with Kalina Manova: w18867
What determines the choice of countries' trade partners? Is there an order that firms follow when entering foreign markets? We show theoretically and empirically that financial market imperfections affect the number and identity of exporters' destinations. Bigger economies with lower trade costs are relatively more attractive markets because they offer cross-border sellers higher profits. This generates a pecking order of destinations such that exporters serve all countries above a cut-off level of market potential. Credit constraints raise this cut-off and prevent firms from entering some markets that they could profitably service in the first-best. Financially advanced exporters thus have more trade partners and go further down the pecking order of importers, especially in sectors that r...

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