WORKING PAPERS. Export Credit Guarantees and Export Performance. Evidence from Austrian Firm-Level Data. Harald Badinger, Thomas Url

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1 ÖSTERREICHISCHES INSTITUT FÜR WIRTSCHAFTSFORSCHUNG WORKING PAPERS Export Credt Guarantees and Export Performance Evdence from Austran Frm-Level Data Harald Badnger, Thomas Url 423/2012

2 Export Credt Guarantees and Export Performance Evdence from Austran Frm-Level Data Harald Badnger, Thomas Url WIFO Workng Papers, No. 423 March 2012 Abstract Ths paper provdes an economc assessment of export credt guarantee commtments by the Austran export credt agency, usng frm-level data on a cross-secton of 178 Austran exportng frms for the year In a frst step, we estmate the relatve mportance of varous determnants of export guarantee usage. Results suggest that the most crucal determnants are: frm sze, whether or not the frm s part of a multnatonal enterprse, exposure to revenue rsk, and R&D ntensty. In a second step, we nvestgate the effects of export guarantees on export performance. Identfcaton s acheved by usng as nstruments the exogenous determnants of export guarantee usage dentfed n the frst step. We fnd that there are economcally and statstcally sgnfcant effects of export credt guarantee usage on frmspecfc export performance rangng from some 80 to 100 percent compared wth the control group of non-users. E-mal addresses: [email protected], [email protected] 2012/048/W/ Österrechsches Insttut für Wrtschaftsforschung Medennhaber (Verleger), Hersteller: Österrechsches Insttut für Wrtschaftsforschung 1030 Wen, Arsenal, Objekt 20 Tel. (43 1) Fax (43 1) Verlags- und Herstellungsort: Wen De Workng Papers geben ncht notwendgerwese de Menung des WIFO weder Kostenloser Download:

3 Export Credt Guarantees and Export Performance: Evdence from Austran Frm-Level Data Harald Badnger Department of Economcs, WU Venna, Augasse 2-6, A-1090 Venna, and Austran Insttute of Economc Research (WIFO) Tel.: , Fax: E-mal: [email protected] Thomas Url Austran Insttute of Economc Research (WIFO), Arsenal, Objekt 20, A-1030 Venna E-mal: [email protected] March 2012 Abstract: Ths paper provdes an economc assessment of export credt guarantee commtments by the Austran export credt agency, usng frm-level data on a cross-secton of 178 Austran exportng frms for the year In a frst step, we estmate the relatve mportance of varous determnants of export guarantee usage. Results suggest that the most crucal determnants are: frm sze, whether or not the frm s part of a multnatonal enterprse, exposure to revenue rsk, and R&D ntensty. In a second step, we nvestgate the effects of export guarantees on export performance. Identfcaton s acheved by usng as nstruments the exogenous determnants of export guarantee usage dentfed n the frst step. We fnd that there are economcally and statstcally sgnfcant effects of export credt guarantee usage on frm-specfc export performance rangng from some 80 to 100 percent compared wth the control group of non-users. Keywords: Exports, publc export credt guarantees JEL No: F13, H81, C21

4 I. Introducton Publc export credt guarantees are an mportant nstrument n fnancng nternatonal trade. Whle ther provson s nowadays hghly restrcted by nternatonal agreements and European economc law, they are stll an mportant polcy tool to mtgate the negatve trade effects of fnancal constrants due to market falures such as asymmetrc nformaton. The use of export credt guarantees has surged recently as a result of the fnancal and economc crss and ts detrmental effects on nternatonal trade. New commtments by export credt agences expanded between 30 and 50 percent up to md-2009, ncreasng the share of covered world trade from 8 percent n 2008 towards 9 percent by md-2009 (OECD, 2009; Asmundson et al., 2011). The ncreased use of export credt guarantees rases the queston of ther effectveness as a tool for promotng nternatonal compettveness and exports. Ths queston has become ncreasngly relevant n lght of the current dscusson about reducng global and euro area mbalances. In partcular, successful models of export credt guarantees already n place mght serve as role models, and provde one means (among others) for countres strugglng to reduce ther current account defcts. Whle there s some evdence on the negatve effects of fnancal constrants on nternatonal trade, the role of publc export guarantees n supportng export actvty s not well researched. Moser et al. (2008) use a dynamc macro-panel for German export flows, dsaggregated by recevng country, to estmate the effect of the German programme, whle Egger and Url (2006) analyze a statc macro-panel, wth Austran export flows dsaggregated by recevng country and knd of actvty. Both studes fnd that poltcal rsk has a detrmental effect on nternatonal trade. Furthermore, export credt guarantees lead to a more than proportonal ncrease n exports,.e., guaranteed exports create follow-up delveres wthout cover by an export credt agency. To the best of our knowledge ths paper s the frst one to provde frm-level evdence on the trade effect of publc export credt guarantees. In partcular, we present evdence on ) the determnants of frms use of export credt guarantees provded by the Austran export credt agency (Oesterrechsche Kontrollbank AG), and ) the effects of Austran export credt guarantees on frms exports. We use a new data set of 178 Austran frms from year 2008, whch s partcularly well suted to our subject. Frst, the data set enables us to exclude ntrafrm trade, for whch export guarantees have been shown to be more or less rrelevant (Chauffour and Farole, 2009). Thus we can focus on extra-frm trade, where nformaton asymmetres are potentally mportant. Second, the sample s manly made up of small and medum-szed enterprses, where the effects of fnancal constrants are expected to be most severe, and where export guarantees can be expected to play a strong role (Chauffour and Farole, 2009). Based on nformaton about varous frm characterstcs, we provde n a frst stage an assessment of the determnants of the frms export guarantee usage. In a second 2

5 stage, we estmate the effect of export credt guarantees on (extra-frm) trade exports. To address endogenety concerns due to reverse causalty for a gven frm sze, a hgh export level ncreases the lkelhood of export guarantees usage we estmate the trade effects by two-stage least squares, usng as nstruments the (exogenous) determnants of export guarantees dentfed n the frst stage. We fnd that large frms wth a hgh rsk exposure and hgh R&D ntensty are more lkely to make use of publc export credt guarantees. On the other hand, beng part of a multnatonal enterprse (MNE) reduces the ncentve to use them, suggestng that nternatonal ntegraton of frms s also a means of reducng nformaton asymmetres. Moreover, we fnd a szeable, economcally and statstcally sgnfcant effect of export credt guarantees on extra-frm exports, rangng from some 80 to 100 percent. The remander of the paper s organzed as follows. Secton II provdes a survey of the recent lterature on export guarantees, fnancal constrants, and nternatonal trade n lght of the recent fnancal and economc crss. Secton III presents the data and some stylzed facts on the use of export credt guarantees provded by the Austran export credt agency (Oesterrechsche Kontrollbank AG). Secton IV motvates and sets up the emprcal models regardng ) the determnants of export guarantee usage, and ) the trade effects of export guarantees, and presents the estmaton results. Secton V summarzes the results and concludes. II. Export Guarantees, Fnancal Constrants, and Exports: A Bref Survey of the Lterature 1. Modes of Trade Fnance Cash payments are rare n nternatonal transactons. Varous fnancal nstruments have emerged as substtutes for the lack of face-to-face cash transactons between supplers and customers n nternatonal trade. Trade fnance usually assumes the form of open account fnance, whch covered between 38 and 45 percent of global merchandse trade n 2008 (Asmundson et al., 2011). In ths case the exporter drectly extends credt to the mporter and thus bears the credt rsk and the burden to provde lqudty to the counterparty. Alternatvely, exporters may resort to cash-n-advance payment by the foregn customer, thereby shftng the rsk of delvery to the mporter who then faces the task of provdng the lqudty for the transacton. Accordng to estmates by the Internatonal Monetary Fund, cashn-advance arrangements covered around one ffth of global merchandse trade n 2008 (Asmundson et al., 2011). 3

6 Fnally, frms may use bank-ntermedated trade fnance rather than drectly offerng credt. A common nstrument s the guarantee of a bank for payment after delvery of the goods (letter of credt). Alternatvely, banks may provde lqudty before, durng, and after the shpment of the product. A servce wdely used by exporters s supply chan fnancng or factorng, where the bank provdes the workng captal to the exporter and purchases the accounts recevable resultng from the trade at a dscount. Banks also provde non-bankng servces, lke export credt nsurance, book-keepng, and handlng tradng and delvery documents. Bankntermedated trade fnance covered another 35 to 40 percent of global merchandse trade n 2008 (Asmundson et al., 2011). 2. Trade Fnance Durng Perods of Economc Crses Durng the fourth quarter of 2008 nternatonal trade contracted sharply. Ths gave rse to several publc polcy nterventons to bolster trade fnance. The rapd polcy response, drven by concerns about the spread of the growng lqudty crunch n the money market towards the provson of nter-frm trade credt, led to a G20 agreement on a package at ther Aprl 2009 meetng n London (G20, 2009) to ensure suffcent addtonal capacty for trade fnance to support $250 bllon of trade over the perod. Rapdly growng country and counterparty rsks had prevously been seen n fnancal crses n the late 1990s and early 2000s. At those tmes local banks n Thaland, Korea, Pakstan, Argentna, and other emergng countres faced opaque and ntertwned lqudty and solvency problems that resulted n a substantal loss of credblty. Internatonal banks reportedly refused to confrm or underwrte letters of credt opened by local banks because of a general reducton n country credt ratngs by ratng agences (Ferr et al., 1999) and a smultaneous loss of confdence n the respectve local bankng systems. At the same tme trade volumes declned substantally (Aubon and Meer-Ewert, 2003). Amt and Wensten (2009) argue that exports are more senstve to fnancal frctons than domestc sales because a larger porton of export sales s on open account. Based on ths evdence, Ahn et al. (2011) fnd that durng 2008 US exports declned more steeply n sectors wth greater fnancal dependence. Feenstra et al. (2011) and Manova et al. (2011) also fnd that the fnancal crss had a szeable negatve mpact on Chnese exports. Cross border trade credt s more rsky compared to conventonal loans for physcal nvestment or for buyng workng captal because there are addtonal macro-level rsks, e.g., exchange rate fluctuatons, poltcal rsks, and counterparty rsks resultng from dffcultes n gatherng nformaton about the tradng partner and enforcng repayment n a foregn jursdcton. Ths frcton s even more pronounced durng a fnancal crss as the credblty of commtments by the foregn tradng partners and banks s eroded by ncreased levels of asymmetrc nformaton. A recent World Bank study reports substantally hgher costs, and 4

7 even a lack of trade fnance, after the onset of the fnancal crss n the second half of 2008, n partcular for small and medum-szed exporters located n emergng markets (Chauffour and Farole, 2009). 3. The Role of Publc Export Credt Guarantees Publc export credt guarantees are a polcy nstrument used to allevate trade frctons arsng from dffcultes n fnancng export flows. Due to the possblty of hdden export subsdes, the provson of publc export credt guarantees s hghly restrcted by nternatonal agreements (Knaepen, 1998) and EU law (EU Councl Drectve 98/29/EC). Exporters can get nsurance aganst the consequences of non-payment of ther recevables only f they face nonmarketable rsks,.e., rsks are restrcted to hgher-rsk export markets, comprsng essentally emergng and developng countres, and for open account terms wth payment perods of more than two years. Usually, guarantees by export credt agences are fully backed by the government. Publc guarantees are provded ether drectly, by publc enttes, or ndrectly, by a prvate bank or an nsurance company on behalf of the government. Export credt guarantees are most relevant for open account transactons as the rsk of payment by the foregn mporter les fully wth the exportng frm, but they also cover the rsk for banks resultng from the ssuance of letters of credt. Asmundson et al. (2011) estmate that n 2008 around 18 to 25 percent of outstandng open account transactons (around 8 percent of total world trade) were covered by export credt guarantees.. The protecton aganst losses from non-payment s subject to nsurance premums that are supposed to cover the expected loss of the credt agency. Under the perfect market assumptons, hgher rsk wll be reflected n a hgher premum for export credt nsurance. Yet under asymmetrc nformaton, the effect of ncreased premums on the composton of the nsurance pool s smlar to the effect of hgher nterest rates on the composton of debtors n the credt portfolo of a bank: a hgher nterest rate crowds out good rsks (Stgltz and Wess, 1981). Export credt nsurers thus wll start to refuse to underwrte those rsks thought to be partcularly prone to losses rather than ncreasng nsurance premums (Rothschld and Stgltz, 1976). Publc export credt agences may overcome ths quantty restrcton by provdng export credt guarantees, thereby promotng trade that mght otherwse not occur due to lack of fnancng. An OECD (2009) survey among the 31 partcpants n the arrangement on offcally guaranteed export credts shows that new commtments expanded between 30 and 50 percent durng the fnancal crss. As a consequence, the share of world trade covered by publc export credt guarantees ncreased from 8 percent n 2008 to 9 percent n OECD (2009) and Asmundson et al. (2011) provde a detaled lst of expansonary steps by export credt agences durng the fnancal crss. 5

8 Theores of trade credt motvate ther exstence as a mechansm for easng access to fnance for credt-constraned buyers. For example, sellers may have nformatonal advantages over banks n assessng the rsk of default by the buyer (Smth, 1987; Brennan et al., 1988). The seller may also have better access to the collateral and better ablty to convert t nto money (Petersen and Rajan, 1997) or sellers may use recevables as collateral for bank credt and thus smultaneously mprove access to fnance for both the seller and the buyer (Burkart and Ellngsen, 2004). For a sample of Belgan frms, Deloof and Overfelt (2011) suggest that trade credt was a tool for channellng funds from frms wth close bankng tes to other frms durng the pre-world War I perod. Love et al. (2007) provde evdence that bank credt was substtuted by trade credt durng the 1997 Asan fnancal market crss. Besdes purely fnancal reasonng, the provson of trade credt allows frms to add features to ther products characterstcs, whch may help to secure long-term tradng relatons wth customers by provdng fnancal servces; moreover, t also facltates prce dscrmnaton between customers (Gannett et al., 2011). Trade credt may also be used to reduce the seller s nventory holdng costs by provdng the buyer wth a subsdy (Darpa and Nlsen, 2011). Fnally, trade credt provdes a credble sgnal of hgh qualty products and servces because the buyer has the opportunty to delay payment untl a successful verfcaton or a resale s accomplshed (Lee and Stowe, 1993). Based on a sample of 56 large buyers, Klapper et al. (2011) fnd evdence n favor of the warranty motve. 4. Trade Effects of Export Credt Guarantees Regardng ther effects on nternatonal trade, export credt guarantees can be nformally thought of as a reducton n both fxed and varable trade costs, whch would mply an ncrease both at the extensve and the ntensve margns of nternatonal trade n standard new trade theory models wth heterogeneous frms (Meltz, 2003). Recent work (Manova, 2008) explctly ntroduces credt constrants nto the Meltz (2003) type heterogeneous frms model, thereby creatng an nteracton between frm heterogenety and fnancal constrants. Ths nteracton renforces the selecton of only the most productve frms nto export actvtes. For technologcal reasons, exporters n ths model have to fnance dfferent shares of ther export costs externally, and frms vary wth respect to the amount of tangble captal they can put forward as collateral. Ths dfferentaton depends upon the knd of actvty. Furthermore, better developed domestc fnancal markets mtgate restrctons on external fnance as they make the enforcement of fnancal contracts easer. The model predcts that the productvty cut-off vares over countres accordng to the development of the domestc fnancal sector and across ndustres accordng to ther need for external fnance and ther ablty to pledge tangble captal as collateral. 6

9 In a two-stage estmaton Manova (2008) fnds that credt constrants reduce frm-level exports of US frms, lmt export product varety, and ncrease product churnng for countres wth less developed fnancal markets. Bellone et al. (2010) lnk fnancal factors to frms export behavor n a set of French manufacturers. In addton to dfferences n productvty, heterogenety n fnancal constrants helps to explan the selecton of frms nto exporters and non-exporters. Summng up, there are strong theoretcal reasons, along wth some emprcal evdence, to assume that publc export credt guarantees help to overcome market falures related to asymmetrc nformaton by provdng nsurance where no prvate markets exst. They thereby mtgate fnancal constrants, facltate the provson of trade credt by exporters to ther customers, and reduce uncertanty and trade costs, such that one would expect an effectve system of publc export credt guarantees to promote nternatonal trade both at the extensve and ntensve margn. In the next secton, we wll take up ths hypothess, usng a sample of 178 Austran frms, and test for the effects of export credt guarantees on export performance. III. Data and Descrptve Statstcs Before turnng to the econometrc analyss of the determnants and effects of export credt guarantees, we provde a short descrpton of the dataset. The data are from a survey among Austran frms conducted n June 2009 and refer to actvtes n the last completed busness year of the respectve frm at that date. The questonnare asks (among other thngs) for general management ratos, employment fgures, measures of human captal, research and development actvtes, measures of export actvty, and nformaton on the use of export guarantees. The frms denttes for a part of the sample were provded by the Oesterrechsche Kontrollbank (OeKB), the Austran export credt agency. Ths part of the sample s made up of the OeKB s recent users of export credt guarantees. To ths sample of users we added a control group of frms not usng export credt guarantees, whch were matched by frm sze (based upon the number of employees) and knd of actvty (NACE1) to the sample of users. The questonnare was sent out by the Austran Insttute of Economc Research on behalf of the Mnstry of Fnance to 832 frms. A remnder specfcally targeted to frms actve wthn classfcatons that showed low response rates durng the frst four weeks of the survey helped to acheve a balanced sample. A total of 252 frms responded to the questonnare, of whch 221 frms ndcated export actvtes. About half of the exportng frms (104) acknowledged at least a one-tme use of export credt guarantees n the past. Due to ncomplete answers we can use only 178 observatons n the econometrc analyss of the determnants of export guarantees. In the analyss of the trade effects of export guarantees, whch s more data-demandng and uses a 7

10 larger set of varables, the sample s further reduced to 71 frms. In ths secton, we refer to the two samples of 178 and 71 frms as the full and reduced sample, respectvely. Table 1 provdes a lst of the key varables and summary statstcs. < Table 1 here > Frms were asked to supply nformaton on total exports, total sales (SALES), the share of exports n ther sales, and the share of ntra-frm exports to own foregn subsdares. Ths nformaton allows us to calculate, for the reduced sample of 71 frms, the value of extra-frm exports (EXP), defned as exports excludng delveres to own subsdares. The upper panel of Table 1 gves summary statstcs for the full sample of 178 frms. Ther average sales amount to 101 mllon, but ths measure s clearly upward based, as can be seen by the comparatvely low medan value of 28.8 mllon. Hence, most of the frms n our sample belong to the group of small and medum-szed enterprses accordng to the Eurostat classfcaton. Around half of the frms used export credt guarantees (D G ) n the recent past and some 30 percent belong to a multnatonal enterprse (D MNE ). Average spendng on R&D as a share of sales (RD) amounted to 5 percent n our sample. Ths value exaggerates nnovatve actvty because the medan n the sample s at 2 percent. The lower panel n Table 1 presents the same summary statstcs for the reduced sample of those frms, whch also provded nformaton on ntra-frm trade (and all requred explanatory varables). Compared wth the full sample, frms n ths sub-sample are bgger, use export guarantees more often, and belong to a MNE less often. We also measure frm-specfc revenue rsk from provdng nternatonal trade credt by aggregatng country specfc credt rankngs, from the Insttutonal Investor for the year 2008, nto regonal rsk measures 2. Our survey provdes nformaton on the share of exports to three regons: ) ndustralzed countres (EU27, NAFTA, USA, CAN, and NZL), ) Southeastern Europe and Commonwealth of Independent States (CIS), and ) the rest of world. From the perspectve of an Austran frm, regons outsde the European Unon exhbt a hgher rsk wth regard to actually gettng payment for outstandng recevables. We construct frm-specfc rsk measures n two steps. We start from country-specfc credt ratngs and compute weghted averages for the three regons usng Austra s export shares to these countres. 3 The correspondng measures for the three regons are (EU27, etc.), (Southeastern Europe and CIS), and (rest of the world). In a second step, we use frm-specfc nformaton from our survey about the dstrbuton of the frm s exports across those three regons and aggregate the regonal credt ratngs from the frst step nto a trade-share- 2 The country credt ratngs provded by the Insttutonal Investor range from 0 to 100 and are decreasng n country rsk. The ratngs reflect global and natonal economc condtons, the publc polcy stance and general poltcal rsks. To obtan a more ntutve defnton of our rsk measure, we multply the ndces by -1/100, so that they are defned over a range from -1 to 0 and ncreasng n rsk. 3 As an alternatve to calculate the aggregate rsk measures for the three country groups, we used GDP shares of the destnaton countres as weghts and obtaned very smlar results. 8

11 weghted, frm-specfc rsk measure. The full and the reduced sample n the upper and lower panel of Table 1 are hghly smlar wth respect to the rskness of exports. < Table 2 here > A rough look at the data shows that frms wth hgh export volumes are above average users of export credt guarantees. In the survey ther exports accounted for 62 percent of the total export volume declared. On the other hand, Austran subsdares of a multnatonal enterprse (MNE) tend to use export guarantees less often; only a quarter of MNE-subsdares n the sample use Austran export credt guarantees. Ths s also reflected n the uncondtonal correlatons n Table 2. A comparson wth respect to R&D expendtures reveals that export guarantees users range nether low nor hgh among the frms n our sample. As expected, there s a postve correlaton between sze and export volume. Fnally, we observe a szeable postve correlaton between the dummy varable for users of export credt guarantees and the (log of) extra-frm exports. IV. Emprcal Model and Estmaton Results 1. Determnants of Export Credt Guarantee Usage In a frst step, we assess the mportance of alternatve determnants of the lkelhood for export credt guarantee usage. As a mcro-economc motvaton consder the followng probt model G P( D 1X ) F( X λ), (1) where s the (cross-sectonal) frm ndex, G D s a dummy varable, takng a value of 1 f the frm has used an export credt guarantee 4, X s the regressor matrx, and F s the cumulatve densty functon (cdf) of the standard normal dstrbuton. Underlyng the specfcaton n (1) s the latent varable model G X λ, (2) 4 Snce there are hardly frms n our sample that used export guarantees a long tme ago but not over recent years, we have a rather clear-cut dstncton between users and non-users such that we do not take nto account the tme perod when the export guarantee was used. To be more precse, 45 of the 71 frms (used n the regresson of export performance on export guarantees below) are users, and the dstrbuton of frms wth respect to the last year of use s as follows: 1999:1, 2000:1, 2003:2, 2004:1, 2005:1, 2006:2, 2007:3, 2008:13, 2009: 21. 9

12 where the unobserved varable G represents the net beneft from the use of export credt guarantees. Obvously, f the net beneft of an export credt guarantee s postve ( G 0 ), frm wll make use of t, and the varable varable D takes a value of 1. Otherwse, for G 0, the G G D takes a value of 0. Assumng that the error term s standard normally dstrbuted, ths yelds the probt specfcaton gven n equaton (1) (see Wooldrdge, 2010, pp. 565). As an approxmaton of equaton (1), we wll also consder the lnear probablty model D G X λ u. (3) In lght of the mcro-economc motvaton outlned above, we hypothesze that the regressor matrx X ncludes the followng set of varables: Frst, snce use of export credt guarantees s assocated wth fxed costs n terms of effort, admnstratve procedures, and costs of obtanng nformaton, t s plausble to assume that these costs are less relevant for larger frms. Hence, a key varable used n the regresson s frm sze, whch we measure n terms of (the natural log) of annual sales (SALES). Second, gven that guarantees are used to reduce rsk, n partcular non-marketable rsk, we argue that beng part of a multnatonal enterprse (MNE) reduces the need for (and thus the lkelhood of) usng export credt guarantees due to ntra-frm nformaton flows and mproved access to nformaton on foregn markets and tradng partners. Hence, we nclude a dummy varable, takng a value of 1, f the respectve frm s part of an MNE and zero otherwse (D MNE ). Thrd, we expect frm-specfc rsk exposure (RISK) related to export destnatons to be an mportant determnant of the lkelhood of usng export credt guarantees. Ideally, one could use a measure of non-marketable rsks; n lght of data-avalablty, we have to resort to the frm-specfc rsk measure developed n secton III. We expect that ths measure also, to some extent, captures the fact that the use of export credt guarantees s legally restrcted by OECD agreements and EU law for most exports nto the lowest-rsk regon of ndustralzed countres (EU-27, etc.). Fnally, to account for dfferences among frms need for external fnance and ther ablty to pledge tangble captal as collateral across dfferent sectors (Manova, 2008), we nclude fve ndustry dummes at the NACE 1-dgt level. In our vew, these varables of our dataset have the strongest theoretcal motvaton for beng ncluded n model (1). To make the best use of the data, however, we also explore the 10

13 relevance of a range of further varables, namely: human captal n terms of the share of employees wth a certan level of educaton (fve categores, rangng from prmary schoolng to unversty degree), R&D expendtures as a share of sales, a dummy varable reflectng whether the frm has foregn equty holdngs, the share of ntermedates n sales, and the shares of ntermedates sourced domestcally or abroad. Table 3 reports the estmaton results, based on a sample of 178 exportng frms, for whch data on the varables used n equaton (1) s avalable. We start from a lnear probablty model as gven by equaton (3), usng frm sze (SALES) as a sngle explanatory varable. Then we nclude, as addtonal regressors, the dummy for beng part of an MNE (D MNE ) and the frm-specfc exposure on export markets (RISK). As can be seen from the results n columns (1) to (3), each of the varables s sgnfcant at conventonal levels and adds a nonneglgble amount to the explanatory power of the model n column (3), whch amounts to n terms of the R 2. < Table 3 here > All the varables show the expected sgn: Larger frms are more lkely to make use of export credt guarantees; doublng frm sze ncreases the probablty of export credt guarantee usage by some 10 percentage ponts. Beng part of an MNE reduces the lkelhood of export credt guarantee usage by 30 percentage ponts. Fnally, hgher rsk s assocated wth a hgher lkelhood of makng use of export credt guarantees. To gve an economc nterpretaton to the coeffcent of RISK, note that the maxmum (mnmum) of the varable RISK n our sample s (-0.63), the mean s -0.46, and the standard devaton s Hence, an ncrease n RISK by one standard devaton ncreases the lkelhood of export credt guarantee usage by 12.4 percentage ponts. As outlned above, we explored a wde range of other varables as possble determnants. However, of these sets of varables only the research and development rato (RD) turned out to have a sgnfcant effect; results are reported n column (4) and pont to a postve effect on the lkelhood of usng a guarantee amountng to 0.87 percentage ponts for a 1 percentage pont ncrease n the R&D rato. Gven that sze and rsk s controlled for n the regresson, the mechansm through whch R&D affects export credt guarantee use s not entrely clear; one possble nterpretaton would be that technologcally more advanced frms have a hgher success rato n attractng export credt guarantees. The fnal column (5a) reports the probt estmates of the preferred specfcaton n column (4). As evdent from column (5b), whch shows the average partal effects mpled by the estmates n column (5a), results are very close to those of the lnear probablty model, both n terms of statstcal and economc sgnfcance. Ths also holds true for the specfcatons n 11

14 columns (1) to (3), whch, for the sake of brevty, show the results of the lnear probablty model only. 2. Export Credt Guarantees and Export Performance Havng provded an assessment of the determnants of export credt guarantee use, we go on to estmate the effect of export credt guarantees on export performance, usng the followng baselne specfcaton: ln EXP D. (4) 0 1 ln SALES 2 G j The dependent varable (EXP) s gven by (the natural log of) frm s extra-frm exports,.e., total exports, excludng ntra-frm trade n the form of exports to ther own subsdares. As outlned above, export credt guarantees play essentally no role n the ntra-frm trade (Chauffour and Farole, 2009). For the present sample of frms used n the estmaton of equaton (4), the average share of exports to own subsdares amounts to some 20 percent. The parsmonous specfcaton n (4) ncludes frm sze ( SALES ) as the only control varable. In ths respect t s worth emphaszng that equaton (4) s a cross-sectonal model, and that the dependent varable s defned as (extra-frm) exports of frm (located n Austra) to the world. 5 Hence, frm-nvarant varables specfc to the country of orgn (Austra) and the country of destnaton (the world) are captured by the constant. Moreover, frm-nvarant but ndustry-specfc varables are controlled for by the ndustry fxed effects ( ), whch are ncluded n all regressons. j Note that even for a gven frm sze, the lkelhood of makng use of export credt guarantees may depend on the level of exports. In order to address these endogenety concerns, we reestmate equaton (1) by two-stage least squares (2SLS), usng as nstruments the (exogenous) determnants of export credt guarantee usage dentfed n secton IV.1. Table 4 reports the estmates of model (4) and extended versons thereof, usng a sample of 71 exportng frms, for whch data on the regressors, nstruments as well as exports to non-subsdares (requred to calculate extra-frm trade) are avalable. The least squares results n column (1) pont to a sgnfcant and szeable effect of guarantees on export performance, amountng to some 100 MNE percent. Column (1b) reports the 2SLS estmates of equaton (1), usng D, RISK, and RD as nstruments. Hence, our dentfyng assumpton s that ) beng part of an MNE has no effect on export performance (to other frms), ) rsk exposure has no effect on exports, once export credt guarantee usage has been controlled for, and ) the R&D ntensty has no systematc effect on export performance. 5 Our data set comprses no blateral trade data. For a subset of countres, export shares to the three regons mentoned above are avalable. Some results of regon-specfc regressons wll be dscussed below. 12

15 < Table 4 here > The 2SLS estmates ndcate an even larger effect of export credt guarantees of 126 percent. Instrument qualty s satsfactory wth an F-statstc of excludng the nstruments from the frst stage regresson amountng to Overall there s no strong evdence for endogenety of export credt guarantees wth a p-value of for the Hausman test. Also note that nether the test for over-dentfyng restrctons (OID), nor the Echenbaum, Hansen, and Sngleton (1988) orthogonalty tests for each sngle varable (EHS) reject the null of vald nstruments. In lght of the fact that there s no strong evdence of endogenety and gven that n all specfcatons the 2SLS estmates turned out to be larger than the LS estmates, we focus on the least squares estmates n the followng for conservatveness and nterpret the estmated effects as a lower bound. To explore the senstvty of the results we nclude as addtonal regressors the varables D MNE, RISK, and RD respectvely, to see whether there s evdence of a sgnfcant effect of these varables n the second stage regresson. Results are reported n columns (2) to (4). Nether of the varables turns out to be sgnfcant, and the effect of export credt guarantees s vrtually unaffected n the regressons. The fact that research and development does not affect exports s somewhat surprsng. Although our nstrument dagnostcs ndcate no msspecfcaton, we re-estmated the specfcaton n column (1b) excludng RD as an nstrument from the 2SLS regresson. Ths addtonal robustness check reduces the nstrument qualty and standard errors ncrease, but the effect of export guarantees (D G ) on export performance remans sgnfcant at the 10 percent level wth an even hgher coeffcent of Fnally, restrctng our attenton to the least squares estmates allows us to slghtly ncrease our sample to 81 observatons by ncludng the frms on whch data for (some of) the nstrumental varables are unavalable. The estmates of the preferred specfcaton for ths extended sample, whch are reported n column (5), are consstent wth our prevous fndngs. Another nterestng result (not reported n the table) emerges from the estmaton of our preferred specfcaton n column (5) for exports to each of the three regons (ndustralzed; Southeastern Europe; rest of world) separately. However, results are not drectly comparable wth those n Table 4 snce we have to use total exports rather than extra-frm exports (whch are not avalable by regon). 7 Re-estmatng model (4) wth a sample of 99 frms for each 6 Stock and Yogo (2005) provde crtcal values, dependng on the number of endogenous varables and the number of nstruments, to test the null hypothess that nstrument qualty s below one of four pre-specfed qualty levels, defned n terms of the maxmum tolerable sze dstorton of a conventonal Wald test or the maxmum tolerable bas relatve to OLS. In the present context, the Stock and Yogo test mples that we can reject the null of the nstrument qualty beng below the hghest level. 7 Moreover, the frms n the sample for whch data on exports by regon are avalable and the sub-sample for whch data on extra-frm exports are avalable ntersect only partly. Fnally, some of the exportng frms do not 13

16 regon separately, we fnd that the effect of export credt guarantees s nsgnfcant for exports to the group of ndustralzed countres (EU27, etc.) wth a coeffcent of and a p-value of but becomes sgnfcant at the 5 percent level for the second regon (Southeastern Europe and CIS) wth a coeffcent of It s hghest for the thrd regon (rest of world), wth a coeffcent of (statstcally sgnfcant at the 1 percent level). Ths reflects the fact dscussed above that the use of export credt guarantees s hghly restrcted for exports to EU but also to other OECD countres through nternatonal agreements and EU law. Moreover, t suggests that the effect of export credt guarantees s larger for exports to countres assocated wth hgher credt rsk. Overall, our results suggest a statstcally and economcally szeable effect of export credt guarantees on export performance, rangng from 97 to 126 percent. In lght of our crosssectonal specfcaton, these estmates should be regarded as long-run equlbrum effects of export credt guarantees. Moreover, f we account for the fact that exports to frms other than own subsdares (used n the regresson) amount to 80 percent of total exports, the mpled effect of export credt guarantees on total exports ranges from 78 to 101 percent. V. Conclusons Ths paper consders the effects of export credt guarantee usage on trade for a new dataset comprsng a cross-secton of 178 Austran frms for the year From a theoretcal perspectve, export guarantees are expected to foster trade by reducng uncertanty and helpng frms to overcome fnancal constrants. Aganst ths background, the dataset used n the present paper s partcularly well-suted to assess the effects of export guarantees, snce ) t s manly composed of small and medumszed enterprses, where the effects of fnancal constrants are expected to be most severe, and ) t allows us to focus on extra-frm trade, where nformaton asymmetres are potentally mportant. In addton, based on nformaton about varous frm characterstcs, we provde n a frst stage an assessment of the determnants of the frms export guarantee usage. Ths s an nterestng queston n tself and also allows us to address endogenety concerns due to reverse causalty when estmatng the trade effects of export guarantees. We fnd that large, stand-alone domestc frms (whch are not part of an MNE) wth a hgh R&D ntensty and a hgh rsk exposure are most lkely to make use of publc export credt guarantees. Moreover, we fnd a szeable, economcally and statstcally sgnfcant effect of export to every regon. Hence, we use ln(1+exp) as dependent varable n the export regressons by regon, whch results n a sample sze of 99 frms. 14

17 export credt guarantees on extra-frm exports, rangng from about 100 to 130 percent. Related to total exports,.e., ncludng ntra-frm trade, ths amounts to an effect between 80 and 100 percent. Our result s n lne wth fndngs based on macro-panels, showng a more than proportonal effect of export credt guarantees on export volumes. Whle the pont estmates should not be overemphaszed, the results clearly show that export credt guarantees, already coverng some 9 percent of world trade, have a non-neglgble effect on the ntegraton of the world economy. Moreover, our results ndcate that export guarantees are a partcularly effectve nstrument for preventng large slumps n nternatonal trade durng tmes of ncreased uncertanty and mutual dstrust. Fnally, the results suggest that the Austran system works well n bolsterng export performance. A full assessment of the export credt guarantee system, however, would have to nclude the programme costs arsng from the state-backed guarantee that substtutes for the solvency captal prvate nsurance companes would have to assgn for each underwrtng. The OECD agreement elmnates ncentves to offer ndrect subsdes through premums below the expected value of losses. Consequently, the Austran export credt guarantee system s balanced n the long run. Nevertheless, market dstortons may well result from the non-proft strategy of export credt agences and the cost advantage of state guarantees over the provson of solvency captal by prvate nvestors. On the other hand, the export-promotng effect of guarantees certanly has postve repercussons for output, employment, and general tax revenues. Whle a full assessment of all these effects s beyond the scope of ths paper, a more comprehensve assessment of the costs and benefts of publc export credt guarantees s an nterestng avenue for future research. From a polcy perspectve, further country-specfc studes on the functonng of export guarantee systems would be of nterest to dentfy possble dfferences n ther effectveness. The most effectve and effcent systems mght then serve as role models for countres strugglng wth persstent current account defcts or as models for systems that can be actvated or extended durng perods of severe economc downturn n order to prevent a sharp drop n nternatonal trade. 15

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21 Table 1. Summary Statstcs of the Key Varables Varable Mean Medan Max. Mn. Std. Dev. Skewnes s Kurtoss Full sample (178 frms) D G ln SALES SALES D MNE RISK RD Reduced sample (71 frms) Exports (total) EXP ln EXP D G SALES ln SALES D MNE RISK RD Notes: Source s a survey by the Austran Insttute of Economc Research (WIFO) among Austran frms. Varable defntons: D G s a dummy varable, takng a value of 1 f the respectve frm has used an export credt guarantee n the recent past. Frms sales are gven n mllons of Euros. D MNE s a dummy varable, takng a value of 1 f the respectve frm s part of a multnatonal enterprse. RISK s a frm-specfc ndex of revenue rsk n exports, whch s defned over a range from -1 to 0 and ncreasng n rsk (see the defnton above). RD s the rato of expendtures for research as development to sales. EXP are extra-frm exports, defned as a frm s total exports excludng delveres to own subsdares. Table 2. Correlaton Matrx Exports EXP ln EXP D G SALES ln SALES D MNE RISK EXP 0.57 ln EXP D G SALES ln SALES D MNE RISK RD Notes: See Table 1. Reduced sample of 71 exportng frms. 19

22 Table 3. Determnants of Export Credt Guarantee Usage (1) (2) (3) (4) (5a) (5b) LS LS LS LS Probt APE Constant * *** * ** ** (0.246) (0.256) (0.262) (0.264) (1.153) ln SALES *** *** *** *** *** (0.024) (0.026) (0.024) (0.024) (0.083) D MNE *** *** *** *** (0.089) (0.087) (0.084) (0.261) RISK *** *** *** (0.212) (0.215) (0.616) RD ** ** (0.344) (1.239) R a) b) SEE Notes: Dependent varable s export credt guarantees usage (D G ). *, **, *** ndcate sgnfcance at the 10, 5, 1 percent level. All models are based on a cross-secton of 178 exportng frms for the year 2008 and nclude 5 ndustry dummes (at the NACE1 dgt level). Heteroskedastcty-robust standard errors n parentheses. Column (5b) reports the average partal effects (APE) of the probt estmates n column (5a). a) Pseudo R 2, b) Squared correlaton between actual and predcted values. 20

23 Table 4. Export Credt Guarantee Usage and Export Performance (1a) (1b) (2) (3) (4) (5) LS 2SLS LS LS LS LS constant * (0.979) (0.947) (1.407) (1.027) (0.990) (0.851) ln SALES *** *** *** *** *** *** (0.101) (0.099) (0.153) (0.103) (0.102) (0.090) D G *** ** ** *** *** *** (0.304) (0.580) (0.409) (0.334) (0.309) (0.265) D MNE (0.508) RISK (0.974) RD (0.650) R a) SEE obs Notes: Dependent varable s extra-frm exports (ln EXP). *, **, *** ndcate sgnfcance at the 10, 5, 1 percent level. Heteroskedastcty-robust standard errors n parentheses. All models are based on a cross-secton of 71 exportng frms for the year 2008 and nclude 5 ndustry dummes (at the NACE1 dgt level). a) Squared correlaton between actual and predcted values. Instrument dagnostcs for column (1b): F-stat. on excludng nstruments from frst stage regresson: Hausman test (p-value): OID test (p-value): EHS-orthogonalty test (Echenbaum et al., 1998) of D MNE, RISK, and RD respectvely (p-values): 0.611, 0.906,