The influence of industry financial composition on export flow: A case study of a developing financial market

Using a dataset on bilateral trade flow at the industry-level from 1980 to 2006, I determine the influence of the industry financial composition on the export flow between a developing country, Pakistan, and its trading partners. Firms undertaking exporting activities may need to fund their investments from external sources of finances such as bank loans. The degree of financial dependence and asset tangibility of an industry can determine their ability to obtain external finance. Hence, the financial composition is likely to influence the value of export flow. I split the group of importing countries according to their level of financial development and whether they face episodes of banking crisis in order to determine the influence of industry financial composition under different macroeconomic environments. In addition, although the South Asian economies have similar characteristics in terms of the level of financial and economic development, Pakistan has a greater presence of larger domestic banks and foreign banks that are likely to prefer lending to firms that exhibit better characteristics that promise higher returns. Pakistan also records on average a higher level of banking credit than its neighboring countries for the time period considered reflecting its financial depth. I consider whether financial dependence and asset tangibility influence the ratio of total export flow from Pakistan to total export flow from South Asian countries at the industry-level in order to determine the impact of industry financial composition on the regional significance of industry-level export flow from Pakistan.