Heterogeneous Firms in Importing: Theory and Evidence from China

In this study, I explore the effects of the financial status of firms on its decisions to import. The import decision is reflected in various aspects, such as whether to import or buy from home market; what types of goods to import, etc. A novelty of this analysis is that I distinguish between ordinary trade and processing trade, which involves importing inputs to be assembled and re-exported. Several novel patterns emerge. Firstly, a firm's financial status, especially its liquidity, significantly influences its decisions to import. Secondly, regional financial development also has a significantly affect importing decisions. However, a firm's creditworthiness and regional factors work independently (i.e., regional financial development does not alleviate a firm's credit constraints). The findings yield implications for developing economies which demand technological spillovers from advanced markets and those which maintain large trade surpluses with the developed economies.