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"This paper provides firm-level evidence that credit constraints restrict international trade flows and affect the pattern of foreign direct investment. Using detailed data from China, we show that foreign-owned affiliates and joint ventures have better export performance than private domestic firms, and that this advantage is systematically greater in sectors at higher levels of financial vulnerability measured in a variety of ways. These patterns are manifest in firms' export sales, export product scope and number of export destinations. They are also more pronounced when firms face higher trade costs. This evidence indicates that limited credit availability hinders firms' trade flows, and is consistent with foreign affiliates being less constrained because they can access additional funding from their parent company. Our results further imply that financial frictions and host-country financial institutions affect the sectoral and spatial composition of MNC activity. More broadly, our findings suggest that FDI can compensate for domestic financial market imperfections and alleviate their impact on aggregate growth, trade and private sector development"--National Bureau of Economic Research web site

We examine the collapse of international trade flows during the 2008-2009 global financial crisis using detailed data on the evolution of monthly U.S. imports over the November 2006 - April 2009 period. We show that credit constraints and the reduction in the availability of external capital were an important channel through which the crisis affected trade volumes. We identify the effects of credit tightening by exploiting the variation in the cost of capital across countries and over time, as well as the variation in financial dependence across sectors. We find that countries with higher interbank interest rates and thus tighter credit markets export less in every period and are hit harder by the crisis. These effects are especially pronounced in sectors that require extensive external financing, have few collateralizable assets, and can access limited trade credit. Exports of financially vulnerable industries are thus more sensitive to the cost of external capital than exports of less dependent industries, and this sensitivity rises during the financial crisis. Our findings imply that the crisis would have reduced trade flows by 26% more if governments had not acted to lower interest rates, and by 30% less if policy interventions had had a more immediate effect on the cost of capital. These results provide new evidence on the causal effect of credit constraints on trade, and highlight the large real effects of financial market disturbances, the substantial cost of crisis contagion across countries, and the potential welfare gains of policy intervention.