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Access to Credit and Comparative Advantage

Peter Egger & Christian Keuschnigg

abstract Access to external funds is crucial for the entry and expansion of entrepreneurial firms and the sectors they predominantly arise in. This paper reports four important results. First, comparative advantage is shaped by factor endowments as well as fundamental determinants of corporate finance. In particular, a larger equity ratio of firms and tough governance standards relax finance constraints, lead to entry of firms at the lower bound of the productivity distribution, and create an endogenous comparative advantage in sectors where entrepreneurial firms are clustered. Second, in such a setting, factor price equalization does not only depend on technological characteristics of goods production but also of financial intermediation. Third, a small degree of trade protection in the constrained sector can raise a country’s welfare by relaxing
finance constraints if terms of trade effects are small. Fourth, a small degree of protection of the financially dependent industry in a financially underdeveloped country might even raise world welfare
   
type discussion paper (English)
   
keywords Finance constraints, comparative advantage, protection.
   
date of appearance 20-1-2011
page(s) 1-39
review not reviewed
   
citation Egger, P., & Keuschnigg, C. (2011). Access to Credit and Comparative Advantage.