Why short-term finance matters (a lot more) to exporting firms – Bank Underground

Aydan Dogan and Ida Hjortsoe

Exporting allows firms to access a larger market, but it also implies costs and risks. Some of these costs and risks are due to the time between production and sales generally being longer for exported goods than for goods sold in the domestic market. In our recent Staff Working Paper, we find that among UK manufacturing firms, exporters tend to have more liabilities than non-exporters, and we show that the link between short-term liabilities and labour costs is significantly tighter for exporters. This novel evidence supports the view that exporters’ short-term liabilities help cover costs and risks over the longer time period between production and sales. Consequently, financial conditions are likely to affect exporters more than non-exporters.

How do UK exporting and non-exporting firms’ financial situations differ?

We use firm level data on UK manufacturing firms’ balance sheets from Bureau van Dijk. This data set has the advantage of including not only large firms listed on the stock market, but also small and medium-sized firms that are not listed on the stock market. These represent a substantial part of UK exporting firms.

Our baseline data set has 83,745 firm-year observations over the period 1995–2019. On average 46.5% of firms export each year. Table A reports selected characteristics of firms, comparing exporting and non-exporting firms. The numbers reported correspond to the sample mean, while the numbers in parenthesis correspond to the sample median. Though the sample is skewed towards small and medium-sized firms and away from micro firms (with less than 10 employees) and so is not representative of the universe of UK firms, it is clear from comparing the mean and median that the sample has many small and medium-sized firms, and some very large firms too. The median firm in our sample has a turnover of £9,145,000 and 86 employees.

The table shows that exporting firms tend to be larger than non-exporting firms in terms of their turnover and the number of employees. Moreover, exporting firms tend to have more short-term liabilities, more long-term liabilities and a higher amount of total assets. These characteristics are in line with findings in previous literature: exporting and non-exporting firms differ in terms of their size as eg pointed out in Bernard and Jensen (1995) for US firms or Greenaway and Kneller (2004) for a sample of UK firms.

Table A: Summary statistics – baseline sample

Source: Dogan and Hjortsoe (2024).

Why do exporting firms have higher short-term liabilities?

We now focus our attention on the differences between exporting and non-exporting firms’ short-term liabilities. These are liabilities that need to be repaid in the next 12 months. To gain insights into why exporting firms tend to have higher short-term loans than non-exporting firms, we investigate how the relation between short-term liabilities and firm characteristics depends on firms’ exporting status.

In particular, using our firm level balance sheet data we estimate a model in which the short-term liabilities of a firm may depend on its size, as proxied by its contemporaneous turnover, and its labour costs. We allow that relation to differ across exporters and non-exporters, and we include time and firm fixed effects.

We start by considering to what extent short-term liabilities are related to firm size. As already noted, exporting firms are likely to be larger, both in terms of turnover and number of employees. Larger firms have easier access to finance and thus have higher liabilities as argued eg in Gertler and Hubbard (1988) or Gertler and Gilchrist (1994). We estimate the relation between firms’ short-term liabilities and their turnover to be significant and positive: an extra £1,000 of firm turnover is associated with an increase in short-term loans of around £200. For exporting firms, this relationship is a little lower, perhaps because overseas turnover is perceived as riskier by the financial institutions giving out short-term loans.

We now turn to the hypothesis that exporting firms’ working capital requirements are larger than for non-exporting firms. This would be the case if, as emphasised by Alfaro et al (2021), different timings of production and sales are likely to exacerbate financial risks and requirements for exporters. This would also be in line with Antràs and Foley (2015) who point out that longer delivery and transportation times in international trade mean that firms that trade internationally have a larger need for working capital. If exporters are more likely to require short-term finance to cover labour costs during the longer time between production and receipt of proceeds, then we should see a positive correlation between labour costs and short-term loans at the firm level that is more pronounced for exporters.

We check whether exporters’ short-term loans are related to their labour costs, once we control for their size. We find a positive relation between labour costs, as proxied by remuneration costs, and short-term liabilities for all firms – but the relation is significantly and meaningfully larger for exporting firms: for every extra pound paid in remuneration costs, non-exporting firms increase their short-term loans by around £0.74 – but exporters increase their short-term loans by more than £1.30. These results indicate that while short-term loans are related to remuneration for all firms, the correlation is significantly higher for exporters than non-exporters. This is consistent with exporting firms requiring more short-term loans than non-exporting firms in order to (partly) finance labour costs, and thus supports the view that exporting firms’ working capital requirements are larger than for non-exporting firms.

Implications

We identify a link between firms’ short-term loans and their labour costs. This link is tighter for exporting than non-exporting firms, indicating that exporting firms have higher working capital requirements than non-exporting firms. As a result, changes to short-term financing conditions are likely to affect exporters disproportionately.

In our recent Staff Working Paper, we set up a model which aligns with this novel stylised fact. We estimate this model and find that changes to the financial costs of exporting are very important for UK export dynamics: it is the main driver, alongside UK productivity shocks.

Aydan Dogan works in the Bank’s Global Analysis Division and Ida Hjortsoe works in the Bank’s Research Hub.

If you want to get in touch, please email us at [email protected] or leave a comment below.

Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.