Financing constraints, firm dynamics, export decisions, and aggregate productivity

We present a dynamic model in which firms accumulate wealth to avoid bankruptcy and to overcome financing constraints that affect their fixed operational costs and the costs of becoming an exporter. Financing constraints not only affect firms directly when they are binding, but also indirectly, through precautionary saving and the selection of firms via entry and exit of the domestic and export markets. We calibrate the model and test some of its predictions using a rich dataset of Italian manufacturing firms for the period 1995-2003. Financing constraints reduce the aggregate productivity gains induced by trade liberalization by 25 percent by distorting the incentives of the most productive firms to self-select into exporting.