074 cashinadvance and export decision evidence from crosscountry firmlevel data,bachelors thesis

There are several research articlesrelated to credit restrictions of companies like Manova 2013 only studies the credit impact of companies affecting the export of that company.. Specifi

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When trading goods across borders, firms choose the different payment method Themain decision is whether payment should be made before delivery (prepaid) or afterdelivery (postpaid) This is an important aspect of any commercial transaction as itdetermines whether the trading partner must complete the transaction and who takesthe risk

Cash in advance (CIA) is one of the payment methods that affect a company'sability to export The CIA is a method that provides an alternative business fundingsource that export companies can use when there is a lack of collateral or creditratings The CIA is a stipulation in some shipping agreements, requiring that animporter must pay the exporter in cash when contracts are signed or before theshipment is made Advance payment is a safe mode of payment for any businessincluding export business Receiving an amount of sales in advance helps anexporter

in several ways to plan its financial activities smoothly From a buyer’s point ofview,

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With cash-in-advance payment terms, an exporter can avoid credit riskbecause payment is received before the ownership of the goods is transferred Inaddition, the CIA has some advantages for exporters like: It will be a relatively safeway to receive cash follow that exporters no need for collateral or credit becausecommercial loans can affect credit ratings in contrast with the CIA Exporter canhave

cash quickly without much paperwork, the process is very simple, quick procedures

so it helps solve term cash flow problems Small businesses encounter term cash flow problems that can cause major problems for the company The CIAcan help small companies pay cash they need to solve cash flow problems toproduce

short-and operate businesses The final point is that the approval rate is really high Whencompared to the ratios of normal commercial bank loans, it is clear that the CIA hasthe highest approval rate In general, the use of the CIA is much faster thantraditional

business loans If the company needs to replenish exports or attempt to have theexpected sales cycle or to have large quantities of goods or raw materials to produceexports, without delay Most small and medium enterprises will benefit from anincrease in the prepaid capability of importing companies The CIA can be a greatsolution for small businesses who do not have collateral or credit history to apply for

a loan or business credit limit In addition, Businesses can then use the money fortheir company's operations and increase export activity

Requiring payment in advance, however, is the least attractive option forsome

of the buyers, because it creates unfavorable cash flow Foreign buyers are alsoconcerned that the goods may not be sent if the payment is made in advance Thus,exporters who insist on this payment method as their sole manner of doing businessmay lose to competitors who offer more attractive payment terms In contrast to theprepaid method, importers prefer to use the open account method However, thismethod has some drawbacks such as importers do not accept goods or lose the

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Hoefele, A., Schmidt - Eisenlohr, T., & Yu, Z (2016) study the impact ofpayment methods including the prepayment method, open accounts and letters ofcredit to companies operating internationally They focus on the effects ofinternational differences in legal and financial conditions on the payment contractchoice for international and domestic trade There are several research articlesrelated

to credit restrictions of companies like Manova (2013) only studies the credit impact

of companies affecting the export of that company Specifically he finds out thatfirms

that are more affected by credit constraints are less likely to participate in exportmarkets, and if they do, they export less The Muu ^ ls (2008) model has the sameimplication - firms are more likely to be exporters if they are less credit constrained.Buch et al (2009) research the impact of financial constraints on the decision toengage in foreign direct investment and on foreign affiliate sales As far as we know,there is no article that study the impact of prepaid on export activities of credit-constrained companies They have only study separately the impact of the CIA onthe

company's ability to export as well as the impact of credit constraints on the exportdecision of a company Therefore this thesis examines the remaining problem of thefour papers on which a case study on the prepaid case affects the company's ability

to export in specifically and how the prepaid effect on the export decision of constrained companies?

credit-This thesis considers whether the CIA has a significant impact on the exportdecisions of exporting companies, especially for small companies that have severalcredit constraints We argue that international transactions are inherently subject tomore uncertainty than domestic transactions and that the CIA serves as a qualitysignal that helps reduce this high uncertainty In our analysis, we focus on the CIAfinancing to this purpose which we develop a model to determine the driving offactors of the export decision with a focus on the CIA on companies by the scale and

by the extent of its credit constraint More specifically, this thesis has four researchquestions:

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Does prepayment affect the export of small companies?

Is the impact of CIA stronger for companies that have severe credit constraint?Does the CIA contribute to increasing export capacity for companies in Vietnam?

This thesis provides evidence of prepaid payments that the firm receives from

a large number of countries, suggesting that firm characteristics are a centraldeterminant As predicted by the theory prepaid payment transactions are morelikely

to be implemented in developing countries We extend the original theory and usefirm-level cross-country data from 2006-2010 and probit method to estimate anadditional prediction about the effect of the CIA to the company's export With theprobit method we use a model that shows the impact of the firm's export decisionthrough 6 variables to measure such as CIA variables, Size, Foreign, etc Morespecifically, we show that in small companies and especially credit-constrainedcompanies more CIAs will be used than medium-sized companies and companieswith less credit constraints The key finding is that the CIA fosters exportparticipation of small firms only We find that cash-in-advance has a positive effect

on the small firms' probability to export This result is particularly strong for severercredit-constrained firms One possible explanation is that CIA does help small firmsexport by ameliorating credit constraints while it plays no role in large firms.Moreover, cash-in-advance relaxes the credit constraint facing small firms indomestic markets while medium firms rely on alternative forms of credit However,the CIA plays no role in determining the export participation in Vietnam This alsoshows that Vietnamese firms use alternative methods such as access to bank loans,from other organization or borrow from their relatives and friends rather than usingthe CIA

The rest of the thesis is organized as follows:

In Section 2, Literature review we show three strands of literature which the thesisbased on

In Section 3, we develop a model for businesses at the cross-country firm-level datalevel of factors affecting their ability to export

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In Section 4, present our empirical results and evaluating models for companies inVietnam

In Section 5, conclude

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2 Literature review

Our paper is based on three strands of literature First, we rely on the largebody of literature on trade credits Trade credit is part of a joint commodity andfinancial transaction in which a firm sells goods or services and simultaneouslyextends credit for the purchase to the customer Despite the importance of quantity,commercial credit has received very little attention in the literature of the financialeconomy In Lee and Stowe (1993), companies expand trade credit to ensure productquality for customers in their home countries Their research is to explain the cross-sectional variation in trade credit across firms and industries They had developed amodel of the sale process in the intermediate goods market to explain the existence

of trade credit with various payment terms The paper shows that there exists aseparating equilibrium where the size of the cash discount conveys informationabout

product quality The driving forces of this equilibrium outcome are the risk divideefforts of the producer and buyer as well as information asymmetry about productquality The remaining document is based on a guarantee by the quality hypothesisthat was developed by Long et al (1993) He supposes that although trade credit haslong been play an important source of financing for associations, it is one of the leastunderstood methods of doing business and trade credit can serve to distinguish high-and low-quality goods (and producers) Therefore, he focuses on the sellers' decision

to extend trade credit and develop a reduced form model reflecting supply anddemand influence Empirical evidence of the quality that signals motivation for asmall sample of the US and European companies were conducted by Klapper et al(2012) in a recent research paper They find that the longer payment times offered tobuyers, the less reliable suppliers are In other words, buyers are offered longerpayment times if they buy from less reliable suppliers In addition, suppliers offerprepaid discounts to less dependable buyers to minimize payment risks Althoughtrade credit is actually more expensive than bank credit, it contributes to reducinguncertainty, therefore, access to commercial credit helps the less productivecompanies benefit more Biais and Gollier (1997) build up a model in which thecompany extends commercial credit to show their trust in the reputation of thecompany that it provides trade credit Their arguments require trading partners to

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advantage of bank-related information If the sellers intent to extend trade credit, andthus to bear the default risk of the buyer, it must be that it has good informationabout

the latter On observing, the bank update positively its beliefs about the buyer, andtherefore agree to lend In other words, trade credit enables the private informationof

the seller to be used in the lending relationship, and this additional information canalleviate credit rationing due to adverse selection Giannetti and colleagues (2011),find that trading partners do not have continuous information advantages He sawthat

large firms and especially firms with many suppliers also receive more trade creditfor longer periods This again shows buyers' market power affecting the availability

of commercial credit Existing theories fail to interpret why suppliers provide tradecredit to customers with bargaining power instead of offering (larger) pricereduction

Burkart and Ellingsen (2004) the ability to improve access to bank credit forcompanies through commercial credit financing They believe that trade credit tends

to be less diverted than cash This indicates that companies that receive trade creditare less likely to cause moral hazard and banks are willing to lend more credit tothese

companies Furthermore, we clearly consider international transactions that tend toaggravate information asymmetries and differ in the selection of financial regimesfrom domestic transactions Our model has demonstrated how trade credit canrelieve

asymmetric information issues related to foreign trading companions and thuselevate

trade Moreover, the use of supplier credit is a major concern in trade creditdocuments

On the other hand, we relate to documents on trade credit financing ininternational trade Only recently, commercial credit documents are studyingprimarily international transactions and investigating the optimal choice ofcommercial credit Schmidt-Eisenlohr (2013), the choice of trade credit of

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amount of collateral In addition, he gives an explanation of the decline in globaltrade

during the financial crisis partly due to a lack of commercial finance Auboin andEngemann (2014) analyze the effect of trade credit on macro-level trade over theentire cycle through the use of Berne Union export credit insurance data They pointout that export credit insurance has a positive impact, as an authorization forcommercial credit, on trade, this does not change between crisis and non-crisis Therole of banks in international trade is focused on research by Olsen (2011) Heshowed

out that by issuing letters of credit, banks have overcome enforcement issuesbetween

sellers and buyers

Second, we build on the literature on the use of cash-in-advance ininternational trade The choice of the payment contract is sharply influent to someimportant aspects of international trade Because of the allocation financial and riskbetween countries by agreement, they determine how the financial and legalconditions of the source and destination countries affect trade costs This alsoidentifies which financial industry of the country is largely based on and thusinfluences the direction in which financial shocks can be transmitted internationally

We can see the intuitive nature of the trade financial model The requirement forworking capital financing and a potential commitment issue is necessary for anytransaction in international trade because of the time gap between the manufacturerand the seller Payment before delivery (prepaid) is selected, the importer sponsorsthe transaction and a commitment issue arises toward the exporter In the theoreticalmodel, a seller is connected to a buyer Both companies are neutral and buy onetime

Buyers will be made or left with an offer by the seller, specifying the price andquantity of goods sold and the time of payment If payment is required beforedelivery

(prepaid), the importer must borrow money in his domestic financial market.Because

of prepaid, there is a risk for the buyer that the seller does not deliver This is

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whereby advance payments signal customer creditworthiness whilst trade creditguarantees seller product quality

In the basic specification of the experimental section, we analyze thedifference between local and international sales by using statistics about thecompany's export intensity and prepaid payments from a survey In particular, westudy the strength of the company's exports with enforcement measures and financialcosts to predict that the higher export intensity that the firms have, the moreresponsive to changes in levels it has on financial costs and contract performancecompared to firms with a larger share of domestic revenue The experimental resultsare accurate as predicted by the theory That is, for foreign sales, the increase in pre-shipment payment usage and the reduction in post-delivery payment usage is due tobetter enforcement in the source country Higher financial costs in the source countryindicate that more contracts for cash in advance and fewer contracts for pay afterdelivery terms

In Katharina's research, he pointed out that companies use multiple prepaidpayments because it serves as a quality signal that reduces high uncertaintyregarding

international transactions In particular, prepaid payments conducted by foreignbuyers to exporters can alleviate the disadvantage and moral hazard options.Therefore, exports become more profitable to allow less productive companies tostart exporting He uses survey data on German businesses from "BusinessEnvironment and Enterprise Performance Survey" to check the impact of prepaidpayments on companies participating in export Endogenous accounting, we find thatprepaid has a positive impact on the company's ability to export It has been shownthat this impact is particularly strong for less productive companies Daripa andNilsen (2011) illustrate that upstream suppliers will be optimally prepaid by strongerfinancial companies that may delay production later He proposed a simple theory oftrade credit as a subsidy mitigating a negative externality to answer Why would asupplier of inputs provide short-term credit at zero interest to its customers? Histheory also gives rise to comparisons between cases in which trade credit orprepayment is used, suggesting that trade credit (prepayment) is more likely to occurwhen the upstream margin is high (low) relative to the downstream margin There

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few research papers on the role of prepaid in the optimal payment system forinternational trade (Ahn,2011; Schmidt-Eisenlohr,2013) Antras and Foley(forthcoming) show that when contracts are implemented weakly in importingcountries, prepayment is preferred to credit transactions They supposed in cash inadvance transactions, there is no risk that the importer will not pay because paymentarrive before the shipment However, in such transactions exporters, might betempted to shave the quality or otherwise reduce the value of the goods beingshipped

In a similar paper, Eck et al pointed out that prepayment is a key role in importer'squality signal to reduce the high uncertainty inherent in foreign transactions

Third, we relate to the literature on the effect of financial constraint on theexport decision One of the characteristics related to the company's export decision iswhether the company is financially constrained or not Exporters' working capitalrequirements increase because companies need to have enough liquidity to pay thecosts as well as constraints in the credit market and tend to take longer to complete

an export order and payment collection after delivery compared to domestic orders.Economists are just beginning to incorporate these arguments in heterogeneouscompanies' theoretical models and to test the significance of these models in terms ofeconometrics with enterprise-level data Muu ^ ls (2008) He used analytical methodssuch as descriptive statistics; the linear probability model with/without fixed firmeffects, fixed-effects OL and have studied some important issues such as Firms morelikely to be exporters if they have higher productivity levels and lower creditconstraints Credit constraints important for extensive but not for intensive margin oftrade in terms of destination Chaney (2013) and Manova (2013) introduced creditrestrictions on the model of Melitz's heterogeneous and commercial companies(2003) to discuss the role of these restrictions on export decisions In the Chaney(2013) model, companies have to pay extra to access international markets and ifthey

encounter liquidity restrictions to finance these costs, only companies with sufficientliquidity can be exported The Muu ls model (2008) implies that if companies areless

credit constrained, they will be more likely to export Similar to the Manova model

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sector) to point out companies that are more affected by credit restrictions will beless

involved in the export market and if they do, they will export less By using firmfixed

effects for firms active in more than one sector, he showed that Limited creditavailability hinders firms’ trade flows (export sales, export product scope, thenumber

of export destinations)

By using an OLS Fixed-effects method, GMM IV system, the influence ofcredit restriction on the export company is also researched by Czech RepublicManole

and Spatareanu (2010) He finds out that exporters less financially constrained; lessconstrained firms self-select into exporting, but exporting does not alleviate firms’financial constraints Arndt et al (2012) used Establishment-level data; cross-sectionfor 2004/2005, analyze them in Two-step Heckman selection model and concludethat self-reported financial constraints have no impact on firms ’internationalizationdecisions By using data from Census data for firms, 2001-2005 (average valuesover

the years used), Egger and Kesina (2013) studies that credit-constrained firms areless

likely to export and have lower shares of exports in total sales Finally,Kiendrebeogo

and Minea (2012) used Un-balanced dashboard data of 2,387 manufacturingcompanies from the World Bank Enterprise Survey database, 2003 and showed thatFinancial constraints reduce export participation, and have a negative impact on theexport intensity and the hazard rate of entry into exporting And finally the thesisbased on the research paper of Caggese and Cunat (2013), he finds out thatconstrained firms less likely to export when financing constraints are instrumented.Financial constraints do not affect the percentage of sales exported Financingconstraints affect negatively the number of export destination regions

We can see that the other research papers only focus on the impact of

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constraints, followed by model application to businesses in Vietnam to see if theexportability of companies in Vietnam is affected by the CIA

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Variable Obs Mean Std Dev Min Max

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3 Data and Model Specification

3.1 Data discussion

We use a cross-section data from World Bank Enterprise Survey for a period2006-2009 It is an inclusive cross-country firm-level survey covering a broad set ofdeveloping countries In the survey, a firm was asked what percentage of its totalannual sales of the last fiscal year was paid before, on, or after delivery Wecategorize

payment before delivery as cash in advance

We adjust the data set to fix the purpose of our analysis First, we keep onlydata of manufacturing enterprises as this sector is in line with the standard tradetheory Second, as the subjective and objective credit constraints matter, only a firmthat reports both rationed credit and self-ration is kept That is, a firm providesadequate answers for questions related to whether a firm was rejected to bank loanapplication and which level of an obstacle of access to financing firm faces Third,

we also drop incomplete observations

Table 1 portrays the summary statistics of our final data set The data used forour benchmark model contains about 17444 observation of exporting firms from 75countries

Both CIA shares and export decision take any values from zero to one There

is no strong clustering

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Table 1: Descriptive statistics

Panel A: Summary statistics on firm characteristics

LnManager 1743

Panel B1

Table 1 Panel A provides the Summary statistics on firm characteristicsaccording to the variables such as CIA, sale, firm Age, Manager, etc The mainadvantage of this dataset is that it provisions us with an accurate measure of the use

of the CIA by firms More specifically, firms are asked how many percentages oftheir sales in value terms were paid before delivery by their customers over the past

12 months The value of the export decision, CIA and foreign are given ranging fromzero to one in our dataset The summary statistics suggest that there is a sizeablevariation in both the log sales and the log size It fluctuates from 1 to 30 and 5 to 26,respectively Besides, we also control the effects on the CIA by including the age ofthe firm and the manager’s experience The average firm is about 5 years old,whereas

the highest experienced manager is approximate for 4 years Both variables have avariance lower than log sale and log size

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Panel B: Exporters versus non-exporters in the face of credit constraints

Variable Obs Mean Obs Mean Obs Mean Obs MeanShare of

Country Freq Country Freq Country Freq.

Dominican

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Overall, exporters tend to use the CIA more extensively than non-exporters inboth small and medium size whether it is affected by more or fewer credit restrictions.Specifically, in the same level of credit restriction such as a high credit limit, thepercentage of small companies exporting received prepaid is 41.7% higher than that

of non-exporting companies nearly 13% Similarly, in the case of a low credit limit,the percentage of received prepaid of exporters and non- exporters is 38.6% and26.7%, respectively However, this difference becomes more distinct when smallfirms face credit constraint The average share of the CIA received is very similar forboth groups and only marginally higher for exporters Specifically, 41.7% for smallcompanies with high credit limit while small companies with low credit limit are only38.6% Aside from, the larger the number of observations, the smaller the percentage

of businesses receiving CIA Moreover, we find that within the same size quartile,relatively more exporters than non-exporters receive CIA payments Specifically,with the case of small observations, about 17.4 % of small exporters receive a positiveshare of their sales in advance, whereas only 15.4 % of small non-exporters obtainadvance payment There are also other export characteristics reflected in the data setsuch as the age of the manager, have higher sales per worker (labor productivity), andrather tend to be foreign-owned

Firms faced with the severe obstacle by credit constraint tend to use the CIAmore than a minor or modest obstacle It can be seen clearly for both exporters andnon-exporters in each group For example, in small businesses exporting, thepercentage of receiving the CIA of firms having credit severe obstacle is 0.03%higher than minor or modest obstacle firms

In conclusion, these figures demonstrate the important role of the CIA forinternational firms as well as firms faced with high credit constraint Our data alsocaptures other common characteristics of exporters: exporters have higher ages andsales, managers have more experience, and firms are likely to be owned by foreignentities

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Table 2: Number of observation by country

Albania 75 Ecuador 231 Namibia 72

Chile 482 Kenya 246 Tobago 6

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In table 2, the number of observation by countries are described While there is someheterogeneity, no single country’s observations dominate the data set As mentionedabove, we will observe 75 countries on how often they use the CIA.

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3.2 Model specification

The baseline model is specified as follows:

Method: Probit method to estimate

Our model predictions have shown that the CIA facilitates exports due toalleviating asymmetric information problems However, this effect must bepromoted

through the increased export performance of the Small businesses because largebusinesses can export even without a CIA, because they have strong economicpotential or are more accessible to bank loans The firm’s profits from exportingcontingent on the financing options available to the firm, partial CIA versus purebank The model shows how variables affect the company's ability to export of firm

i in year t This is reflected in ExD it variable It can receive 2 values corresponding

to the company's ability to export

The main prediction of the model is on the coefficients of six terms The first is an

indicator CIA it, it is a percentage firm receives prepayment in the total its sale orshare of total sales received in advance and it equal to 1 if the firm receives apositive

amount of the CIA and equal to 0 otherwise Since we do not want to lose all firmswith a zero share of the CIA, we assign zero observations a value that is slightlylower

than zero Secondly, we have LnSaleIf the company receives prepayment, it increases trust in the partner as

it variable, which is defined as the percentage share

of total sales received before delivery of products or services It also varies from 0 to

1 If the rate is higher, it also increases the company's export ability

Thirdly, ExD it also contingent on LnSize it Size is defined through thenumber of full-time labor that the company has, in other words, it answers the

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