Effects of Financial Soundness on Export Activities: Evidence from Firm-Level Data of Korea

ABSTRACT

We examine effects of financial soundness on various export activities of manufacturing firms in South Korea. The main results are as follows. First, the export-starters prepared to have a better financial soundness a few years before becoming export-starter. Second, the better financial soundness at a given year increases a probability for a firm to become a new exporter at the following year. Third, the better financial soundness is related to covering export market entry costs rather than export continuation costs. Our findings imply that the financial soundness plays a self-selection role in increasing numbers of export firms in manufacturing sectors.

KEYWORDS:

• financial soundness
• export entry
• export costs
• self-selection
• Manufacturing firms

JEL CLASSIFICATION:

• F12

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 In the long-term trend of Korean exports, it continued to rise at an average of 15.2% until just before the global financial crisis. After the financial crisis, it fell 29% in the first quarter of 2009 compared to the previous year and showed a trend of recovery until 2012. However, since 2012, it has experienced a period of slowing trade with an average growth rate of 0.9% (Lee et al. 2017).

2 For example, Choi (2017) investigate industrial export and financial situation in Korea. Lee et al. (2017) examine macroeconomics of Korea Trade. Kim et al. (2017) examined how Korean banking system affects export. Our study is different in that we specifically investigate the effects of firm-level financial soundness on the firms’ decision on various export activities.

3 The weak link between productivity and export decision has been known in a small strand of literature such as Hallak and Sivadasan (2008), Powell and Wagner (2014), Son and Hur (2021) and Wagner (2014). But, we are different in that we implicitly assume the imperfectness of capital market and directly examine a role of financial soundness on firms’ export decision.

4 For example, see Chun et al. (2013), Kim and Kim (2015) and Son and Hur (2021).

5 This paper is different from ours, since they examine banks’ financial soundness, not exporting firms’. Unlike their study, we examine the impact of firms’ financial soundness on various export activities – entry decision and export sales; export-starter and never-exporter; export costs related to entry and surviving.

6 Note that firms that have repeated export performance between 0 and (+) are deleted from our study. So, the sample data in Equations (1) and (2) are those of never-exporters for the whole sample period and export-starters starting and continuing export in specific years. And, Equations (3) and (4) use the never-exporters, export-starters and continuous exporter for whole period.

7 Previous studies of Berman and Héricourt (2010), Secchi et al. (2016) and Stiebale (2011) used labour productivity at firm-level and found similar results.

8 It was revised to the 10th Korean Standard Industrial Classification in 2017, but there is little change in the two-digit level of manufacturing classifications.

9 To handle natural logarithmic value, we add 1 to the export amount data before putting it into the function. So if the export is 0, the ln(exort+1) is 0.

10 The marginal effect represents the probability that the binary variable becomes one when each explanatory variable changes by one unit in the logit model in which the independent variables are set as the mean.

11 We compared the firm-fixed effect and the random effect models and found that the Hausman test rejects the random effect model was rejected.