Destination trade credit and exports: Evidence from cross-country panel data

• Published in: Journal of international money and finance 2023-10, Vol.137, p.102900, Article 102900
• Main Authors: Zeng, Shuai, Luo, Changyuan, Zhao, Laixun
• Format: Article
• Language: English
• Subjects: Cash in advance; Deferred payment; Destination trade credit; Exports; Informal finance
• ISSN: 0261-5606
• DOI: 10.1016/j.jimonfin.2023.102900

•Financial development is an important determinant of a country’s comparative advantage. While the existing literature mainly focuses on the linkage between formal finance and exports, informal finance as an alternative source of financing is also important. However, little is known about its impact on export activities. This paper aims to partially fill the gap, from the side of export destinations.•Using the bilateral trade data provided by CEPII-BACI, we employ the Rajan-Zingales identification strategy to provide empirical evidence about how destination trade credit (DTC) affects exports.•We find that DTC promotes a country’s exports disproportionately more in liquidity-dependent industries, and this result passes a number of robustness checks, including placebo and instrumental variable tests.•We show that DTC is more effective in promoting exports from countries with lower levels of financial development, which provides a new perspective to explain why countries with underdeveloped formal finance still achieve rapid export growth. We examine the impact of destination trade credit (DTC) on exports, using cross-country panel data for 2000–2018 and focusing on financing by foreign trade partners. We find DTC promotes a country’s exports disproportionately more in liquidity-dependent industries, a consistent result after addressing endogeneity and various robustness tests. DTC mainly promotes trade by increasing export quantity, while lowering export prices and export varieties. Further, the effect is greater if the level of financial development of the source country is lower, but smaller if the product complexity of industries is higher. During the 2008 global financial crisis, DTC also contributes to export expansion, but the effect is relatively small.