Grin and Bear It: Producer-financed Exports from an Emerging Market

This study uses a unique dataset to provide the first comprehensive test of the theory of export financing. We extend the existing literature by drawing attention to the theoretical and empirical relationship between the extent of competition in the export market and the choice of financing terms. Our dataset covers the universe of Turkey's exports disaggregated by product, destination, and financing terms for the period 2004-2011. Our identification strategy takes advantage of an exogenous shock, namely, the end of the Multi-Fibre Arrangement (MFA), a system of bilateral quotas governing the global trade in textiles and clothing until January 1, 2005. The analysis, based on a difference-in-differences approach, suggests that exporter-financed exports to the European Union disproportionately increased, relative to importer or bank-financed exports, in the post-MFA period in products where Turkish competitors initially faced binding quotas. As Turkey was not bound by EU quotas before the end of the MFA, these results are consistent with an increase in competition pushing Turkish exporters to offer trade financing. Our results also support the other theoretical predictions. They indicate that the prevalence of exporter-financed exports (relative to exports on other financing terms) increases with the institutional quality in the importing country, with this effect being stronger for differentiated products. Exporter-financed exports are also more likely to be destined for countries with a less efficient banking sector.