Local credit and international trade

Abstract

This study investigates the relationship between local access to credit and exports. A model of finance-constrained exporters and bank entry decisions generates trade equations that we estimate with a panel of Brazilian municipal-level trade and banking data. Literature in the financial development field has struggled to deal with the endogenous relationship between finance and economic outcomes. To untangle this reverse causality, we instrument bank presence by using geographic characteristics particular to the bank branching decision. The results show that local bank access matters: increases in bank branches per person increases bilateral exports and varieties at the city- and industry levels. The effect is even stronger for industries where the credit constraint binds, specifically those that use less internal funds and have more difficulty producing collateral.