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Financial reforms and export dynamism in developing countries

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Products from Vietnam arrive at the Phnom Penh Autonomous port in Kandal province. ©Chhor Sokunthea/ World Bank Products from Vietnam arrive at the Phnom Penh Autonomous port in Kandal province. ©Chhor Sokunthea/ World Bank

The participation of businesses in international markets is a fundamental driver of national productivity growth, especially in developing countries. How can the financial sector best support the integration of firms into international markets? What financial reforms should policymakers in developing countries prioritize to achieve these aims?

In a recent paper, we use new data to look at the relationship between financial structures and export dynamism. We show that compared to stock market-oriented financial systems, bank-oriented financial systems tend to have lower export dynamism, especially in developing countries with lax bank regulation and where banks enjoy little independence from political pressures. We conclude that complementing domestic banking reform with the development of capital markets and openness to foreign financial institutions can promote export dynamism and increase productivity. 

In recent years, new research spurred by the availability of detailed datasets, both at the industry and at the firm level, has allowed researchers to establish three new facts.

First, financial development has a positive impact on firms’ ability to enter foreign markets. In particular, financial reforms that increase the ability of borrowers to get credit and for lenders to supply it are conducive to an expansion of the export sector (Manova, 2013; Paravisini et al., 2015; Minetti and Zhu, 2011).

Second, this positive effect manifests itself through a larger number of exporters, a larger volume of export sales, and a higher quality of export products, particularly for industries dependent on credit and with high production costs (Becker et. al, 2013).

Third, the structure of the financial sector matters. For instance, the presence of foreign banks increases exports, particularly toward the home countries of those banks (Claessens and Van Horen, 2021).

Export activities are inherently risky: while exporters can rapidly expand their scale in foreign markets, they can also fail to acquire market shares and be forced to quickly pull back from exporting. Ensuring that this process of attaining export success or failure occurs in an efficient and undistorted way is crucial for sustaining the productivity of the export sector. In our paper (Minetti, Mulabdic, Ruta and Zhu, 2021), we find that, especially in developing countries, the financial structure of a country plays a key role in ensuring the dynamism of the export sector.

Our study uses data on financial structures and regulations and on the export dynamics of a panel of 39 countries over 1997-2014.1 We document that countries where banks are relatively more important than the stock market (i.e., where banks’ credit to the private sector is larger than stock market capitalization) have a somewhat larger export sector, as banks have a stronger tendency to protect incumbent exporters. However, the exporters in these countries are less dynamic, with slower entry and exit from export markets. This chilling effect on exporters’ dynamism occurs especially in countries with limited openness to foreign banks. 

How the financial structure affects the dynamics of exporters depends on the quality of local institutions, including the legal and regulatory systems. We find that less dynamic export sectors are associated with greater relevance of domestic banks in an economy as compared to capital markets and foreign banks, especially in lower income countries with lax bank regulation. This suggests that, in settings where banks are not adequately supervised, the reduced dynamism of exporters could reflect domestic banks’ protection of incumbent exporters more than banks’ efficient selection and screening of entrants. 

These findings provide clear policy implications. Financial and banking reforms can increase dynamism and efficiency among exporting firms when they are accompanied by openness to foreign institutions and by an improvement in the quality of domestic regulation and legal institutions. By promoting entry of new exporters and the exit of underperforming ones, these reforms could significantly increase productivity in the export sector, thereby supporting economic growth in developing economies. 

Becker, B., Chen, J., Greenberg, D., 2013. Financial development, fixed costs, and international trade. Review of Corporate Finance Studies 2(1), 1– 28.

Claessens, S., Van Horen, N., 2021. Foreign banks and trade. Journal of Financial Intermediation, 45, 100856.

Manova, K., 2013. Credit constraints, heterogeneous firms, and international trade. Review of Economic Studies 80(2), 711–744.

Minetti, R., A. Mulabdic, M. Ruta and S. C. Zhu (2021). Financial structures, banking regulations, and export dynamics. Journal of Banking & Finance 124, 106056.

Minetti, R., Zhu, S. C., 2011. Credit constraints and firm export: Microeconomic evidence from Italy. Journal of International Economics 83(2), 109–125.

Paravisini, D., Rappoport, V., Schnabl, P., Wolfenzon, D., 2015. Dissecting the effect of credit supply on trade: Evidence from matched credit-export data. Review of Economic Studies 82(1), 333–359.

1 Export data are from the World Bank Exporter Dynamics Database (EDD).


Raoul Minetti

Professor of Economics and Adjunct Professor of Finance at Michigan State University

Alen Mulabdic

Senior Economist, Development Economics Prospects Group, World Bank

Michele Ruta

Deputy Chief, Strategy and Policy Review Department, International Monetary Fund

Susan Zhu

Professor of Economics at Michigan State University

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