Intermediated Trade and Credit Constraints: The Case of Firm's Imports

Abstract

Growing evidence suggests that a large share of international trade transactions are made through intermediaries and that whether firms use them or not depends on different factors. In this paper, we investigate whether credit constraints introduce a degree of difference among firms in their mode of importing. To begin, we develop a simple analytical framework highlighting the possible links between credit constraints and reliance on import intermediaries, and then use firm-level data from 66 developing and developed countries to test the model's predictions. The results show that credit-constrained firms exhibit a higher probability of importing their inputs using an intermediary, while unconstrained firms are more likely to import directly. Our results also establish that the impact of credit constraints on the probability of indirect importing is amplified for firms with a higher distance from their international sourcing network. Moreover, if firms face other types of frictions to imports, then the probability that credit-constrained firms rely on intermediaries is estimated to be higher. The frictions we consider relate to the degree of regulatory burden and the extent of documentary compliance, time to import and other costs involved in import activities.