Firms’ Financial Health was Key to Avoid Export Market Exit in the Global Financial Crisis

The volume of international trade declined dramatically during the global financial crisis of 2008-09. Since then several explanations have been proposed for this sudden trade collapse. These include a fall in global demand, reviving trade protectionism, a domino effect created by global value chains, and the restriction in external finance for firms. Uncovering the contribution of these various causes to the severity of the trade collapse is crucial to understand the functioning of the global trade system and to mitigate the effects of future economic crises.

A recent KCG working paper “Export Market Exit and Financial Health in Crises Periods”, forthcoming in the Journal of Banking & Finance and written by Holger Görg from KCG and Marina-Eliza Spaliara from the University of Glasgow, investigates the role of the latter factor, access to finance, in the export participation of UK firms in economic crises. Professor Görg and Dr. Spaliara focus on firms which stopped exporting during crisis times and check whether and how the probability of such an export market exit depends on the financial health of the firm. They measure financial health with the debt-to-liabilities and profit-to-assets ratios.

The paper examines two crisis periods, the ERM currency crisis in 1991-93 and the global financial crisis. An important difference between the two is that access to external finance for UK exporters was restricted during the latter but not the former crisis. The authors argue that, if restricted access to finance was an important factor behind the trade collapse of 2008-09, then firms’ financial health has to be found a more important predictor of export exits during the global financial crisis than in non-crisis times, while the same should not hold for the ERM crisis.

The findings of the paper lend support to this hypothesis. First, the paper finds that the probability of export market exit is indeed higher in periods of economic crisis, compared to non-crisis times. This applies both for the ERM and the global financial crises. Second, export exit is more likely to happen, at all times, among firms in poor financial health. And last, but not the least, the sensitivity of export exit to financial health was greater during the global financial crisis than in non-crisis times, which however does not appear to be the case for the ERM crisis.

What can we conclude from these findings? While exporters’ financial health is important to avoid export failures in general, providing access to external finance in crisis periods can prevent unnecessary export exits.

The KCG working paper can be downloaded from here, the article in the Journal of Banking & Finance is accessible here.