Abstract

This article studies the role of financial frictions as a barrier to international trade. We study new exporter dynamics to identify how these frictions affect export decisions. We introduce a borrowing constraint and working capital requirements into a standard model of international trade, with exports more working capital intensive than domestic sales. Our model can quantitatively account for new exporter dynamics in contrast to a model with sunk export entry costs. We provide additional evidence in support of our mechanism. We find that financial frictions reduce the impact of trade liberalization, suggesting that they constitute an important trade barrier.