Destination Financial Stress and Export Performance: Firm-Level Evidence from China

Financial conditions in the home country are shown to be an important determinant of international trade flows. In fact, destination countries' financial stress levels can also affect home country's export performance. In this article, we use the national financial stress index to identify the tightness and risk in the financial market of destination countries. We work with a simple theoretical framework and examine, empirically, how financial stress level in the destination country impacts the extensive margin (variety of goods) and intensive margin (production of each existing good) of exports to each destination. Using Chinese firm-level export data spanning 2000 to 2006, we obtain the following empirical findings: (i) financial stress in the destination country leads to a reduction in exports (to the destination countries), in terms of both the extensive and intensive margins; and (ii) this negative effect is larger for firms with higher levels of financial vulnerability. These empirical results indicate that importing countries' financial environment negatively affects exporters' performance mainly through deteriorating their financial capability due to increased risk of default payment.