Credit constraints, firm exports and financial development: Evidence from developing countries

• The study reconciles the conflicting results in the literature about the importance of credit constraints for the exporting decision.
• It provides micro-level evidence on the effect of several measures of financial development on the exporting decision.
• The paper establishes that institutional reform of the credit market reduces credit constraints with respect to firm exporting in a sample of developing countries.
• The benefits of financial development are particularly high for innovative firms that are dependent on external finance.

This paper examines whether financial development reduces the impact of credit constraints on the exporting decision using firm-level data across 17 developing countries. We approximate credit constraints by a firm's liquidity ratio. In line with a Melitz-type model with borrowing frictions, the regression analysis confirms that the positive effect of a firm's liquidity on the exporting probability is larger for firms located in financially less developed countries. This result highlights the importance of financial development in reducing credit constraints. The empirical results also suggest that financing obstacles and the benefits from better access to finance are particularly high for firms belonging to innovative sectors dependent on external finance.