The impact of financial development on innovation-based exports: Do all firms benefit equally?

Abstract

In a heterogeneous firms model with credit constraints and quality choice, I show that the benefits of easier and cheaper access to external finance through financial development to exporting firms increase in their productivity. More productive firms specialize in higher-quality products and thus stand to gain more from cheaper credit, which is required for quality upgrading. This implies that the quality and export gaps between more and less productive exporters increase as the financial system improves. An empirical analysis using Taiwanese firm-level data for the period 1990-2016 supports my predictions, showing that financial development translates into higher export prices and values for more productive firms. (c) 2023 Board of Trustees of the University of Illinois. Published by Elsevier Inc. All rights reserved.