The Competitive Advantage of Firms and their Proximity to Export Finance Centers by Edward John Arnold March 2008 A dissertation submitted to the Faculty of the Graduate School of State University of New York at Buffalo in partial fulfillment of the requirements for the degree of Doctor of Philosophy Department of Geography, State University of New York at Buffalo Advisor: Alan D. MacPherson, Ph.D. UMI Number: 3307661 3307661 2008 Copyright 2008 by Arnold, Edward John UMI Microform Copyright All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code. ProQuest Information and Learning Company 300 North Zeeb Road P.O. Box 1346 Ann Arbor, MI 48106-1346 All rights reserved. by ProQuest Information and Learning Company. © Copyright by Edward John Arnold 2008 ii iii Dedication Page I dedicate this dissertation to: My family. This would not have been possible if not for my wife Grazyna who supported this effort from the start and made many sacrifices all along the way. Her loving dedication to our family and me kept me on course and relatively sane through the process. My two children Ashley and John who undoubtedly missed out on some time playing outside with Dad but already seem to have developed an appreciation for learning. My brother Jim, sister Jenn, and brother-in-law Steve, although all younger, earned their doctorates in their chosen fields before I started. Their success inspired me. My parents whose wisdom and values I try to emulate and pass on to my own family. Finally, my friends and relatives who have seen me less often and whose parties and barbeques I have missed because I was working on some project for school. iv Acknowledgement I thank my advisor Alan MacPherson whose intelligence, depth of knowledge, and patience were critical to my successful completion of this dissertation. I also thank Sharmistha Bagchi-Sen and Jessie Poon, who were on my committee and provided valuable advice and support and my outside reader Richard Dietz, Senior Economist at the Federal Reserve Bank of New York. I would like to gratefully acknowledge the help of Seth Triggs and Donna Banach for their help with the maps and layout and Jim McConnell who recruited me to the program and convinced me that it could be completed. I enjoyed working with my fellow students; it was truly a pleasure working with so many smart people. Finally, I offer my sincere gratitude to Kush Haq and David Pritchard who completed their PhDs in Geography just before I started and encouraged me throughout the entire process, offered advice, lent me books, and recommended articles. v Contents Dedication Page iii Acknowledgement iv Table of Contents v List of Tables vii List of Figures viii Abstract ix 1. Introduction 1 Research context 3 Fundamental questions 5 Sources of data 8 Structure of dissertation 9 Chapter summary 10 2. Research context and literature review 12 Competitive advantage 12 Access to financing 13 Proximity 15 Face-to-face linkages 18 Dissemination of information 20 Measuring success 21 Transaction size 22 Complexity 23 Chapter summary 24 3. Institutional context 27 Ex-Im Bank 27 Institutional Context 28 Products 29 vi Other Ex-Im Bank Programs 32 Chapter summary 34 4. Survey method 36 Hypotheses 36 Definitions and measurements 37 Data and methodology 42 5. Results from mapping 48 Chapter summary 77 6. Survey results 78 Chapter summary 86 7. Summary and conclusions 88 Major findings 88 Unexpected finding 91 Limitation of the research 92 Future research 94 Implication of the research 95 Summary 96 Appendix A: Survey of firms that did not use Ex-Im Bank 98 Appendix B: Survey of firms that used Ex-Im Bank 100 Appendix C: Disclosure statement 103 Appendix D: Sample letter to firms that did not use Ex-Im Bank 105 Appendix E: Sample letter to firms that used Ex-Im Bank 106 Bibliography: 107 vii List of Tables Table 1: Survey response rates 46 Table 2: All transactions and their proximity to trade finance centers 51 Table 3: Breakdown of number of transactions by trade finance center 55 Table 4: Working capital transactions and their proximity 59 to trade finance centers Table 5: Medium term transactions and their proximity 60 to trade finance centers Table 6: Average distances from trade finance center 64 by transaction size Table 7: Median distances from trade finance center 64 by transaction size Table 8: Size, intensity, and other measures 78 of export sophistication Table 9: How firms first learn of Ex-Im products 81 Table 10: With whom exporters had face-to-face meetings 83 Table 11: Distance trade specialist travel to visit an exporter 84 Table 12: Correlations between export intensity, employment size, 85 and experience Table 13: Hedging 86 viii List of Figures Figure 1. All Transactions 50 Figure 2. Transactions occurring in each category (not cumulative) 51 Figure 3. All Transactions With Distribution Count 54 Figure 4. Average Distance to Nearest Trade Center 58 Figure 5. Working capital transactions occurring in each category 59 (not cumulative) Figure 6. Medium term transactions occurring in each category 61 (not cumulative) Figure 7. All Working Capital Transactions 62 Figure 8. All Medium Term Transactions 65 Figure 9. Medium Term Transactions under $1 million 68 Figure 10. Medium Term Transactions under $5 million 69 Figure 11. Medium Term Transactions over $5 million 70 Figure 12. Medium Term Transactions over $20 million 71 Figure 13. Working Capital under $1 million 72 Figure 14. Working Capital under $5 million 73 Figure 15. Working Capital over $5 million 74 Figure 16. Working Capital over $20 million 75 ix Abstract This dissertation examines the impact of a firm’s proximity to a trade finance center on its export success. The primary focus is on firms that have taken advantage of financing from the Export Import Bank of the United States (Ex-Im Bank). The central proposition behind the dissertation is that firms that are located closer to trade finance centers are more likely to use trade finance products than those that are more remote, and that firms that use trade financing are more successful exporters. Related data regarding the diffusion of information pertaining to trade finance products, the importance of face- to-face meetings in trade finance, and the impact of transaction size on the proximity/usage relationship are also investigated. The data for the dissertation comes from information on US exporters that obtained Ex-Im Bank financing in 2005, and from surveys taken from exporters that used Ex-Im Bank financing and exporters that had not. A number of important findings are uncovered that should be of interest to both economic geographers and policy makers. First, by mapping out trade finance transactions and comparing the results with population statistics, it appears that firms located close to trade finance centers are more likely to take advantage to trade finance products. Second, by comparing surveys of firms that use Ex-Im Bank financing and firms that do not, we see that firms that have used export financing are much more successful exporters. A third finding is that face-to-face meetings are very important to both disseminating information on trade financing and in the establishment of the financing facility. A surprising finding is that transaction size has a negligible impact on a firm’s proximity to finance centers. It would seem reasonable to expect that banks would travel further from the trade finance center to service larger transactions. However, the results show that transaction size has little to no impact. Finally, it seems that firms that used Ex-Im Bank financing not only have higher export intensities but they were are also more experienced exporters, have been in business longer, and were more likely to have used other sophisticated trade finance tools than firms that had not used Ex-Im financing. [...]... exporting and the use of trade finance products The purpose of Ex-Im Bank’s trade finance programs is to support U.S exports By comparing the success in exporting of firms that use Ex-Im Bank financing with the export success of firms that do not, the effectiveness of Ex-Im Bank’s programs and the overall premise that proximity to export finance 4 professionals contributes to a firm’s success in exporting... 2005, the name and address of the exporter, contact name, the size of the credit facility, the country the export was destined for, and the type of transaction This information was used to plot out trade finance transactions and determine their proximity to trade finance centers This database was also used as a mailing list for the survey of Ex-Im Bank product users Information on where trade finance centers. .. for all firms that use trade finance products, it is important to recognize that the majority of US exports are self financed Comparing the geographic distribution of these export finance transactions with the location of trade finance professionals should reveal intuitively a relationship between proximity to trade finance professionals and the likelihood of a firm taking advantage of trade finance. .. taken to gather the information necessary to address these issues First, quantitative information is gathered on the number of loans made, the loan size, and the geographic distribution of the borrowers in relationship to trade finance centers Second, survey information is gathered on individual exporters (both users of specified trade finance products and non-users) to determine their success in exporting... the key findings of the dissertation are identified and put into the context of the purpose of the dissertation and their possible wider contribution Future research opportunities are also identified and discussed, along with the key limitations of the dissertation Chapter Summary There is very little within the literature on economic geography that deals with export finance, proximity to finance centers, ... measures of export success for firms using trade finance tools This dissertation looks at all these things By plotting out the Ex-Im Bank transactions on a map of the United States with trade finance centers identified, an accurate view of the dispersion of these loans is obtained The goal is to see if proximity to these trade finance centers is linked with greater usage of trade finance products The survey... measures export success by a firm’s export intensity There are many examples of geographers and other researchers using a firm’s ratio of export sales to total sales (export intensity) to rate a firms success in exporting The greater the percentage of total sales made up of exports, the more successful the exporter (Colaf, 1994; Kalafsky, 2004; Kalafsky and MacPherson, 2001; MacPherson, 2000; Verwaal and. .. short, proximity may provide a competitive advantage Fundamental Questions 1 Does proximity to trade finance professionals increase the likelihood of the use of trade finance products? This is one of the fundamental questions of the dissertation A goal of this research is to determine if firms that are located in the same geographic area as trade finance professionals are more likely to use trade finance. .. also looks at how firm size, proximity to source, and complexity of information impacts lending trends and the diffusion of information and assesses other relevant information to the context of this study Chapter three reviews the origin and 9 structure of the Export Import Bank of the United States and the context in which it currently operates The third chapter also reviews the financial products that... Overall, the dissertation 10 tests the general proposition that there may be a competitive advantage in being located near a trade finance center when exporting The dissertation also investigates the role of firm size on the effect of proximity to trade finance centers and the likelihood of using trade finance products The study examines how information about trade finance products is dispersed and how . The Competitive Advantage of Firms and their Proximity to Export Finance Centers by Edward John Arnold March 2008 A dissertation submitted to the Faculty of the. travel to the customer. It would seem probable that the more often a trade finance professional is within close proximity to a firm, then the more likely the firm will be aware of the export finance. transactions and their proximity 59 to trade finance centers Table 5: Medium term transactions and their proximity 60 to trade finance centers Table 6: Average distances from trade finance