"The Decision to Import Capital Goods in India: Firms' Financial Factors Matter,"
CEPII Working Paper 2011- 06 , March 2011 , CEPII.
Are financial constraints preventing firms from importing capital goods? Sourcing capital goods from foreign countries is costly and requires internal or external financial resources. A simple model of foreign technology adoption shows that credit constraints act as a barrier to importing capital goods under imperfect financial markets. In our study, we investigate this prediction using detailed balance-sheet data from a sample of about 5,500 Indian manufacturing firms per year, having reported information on financial statements and imports by type of good over the period 1996-2006. Our empirical findings shed new light on the micro determinants of firms’ choice to import capital goods. Baseline estimation results show that firms with a lower leverage and higher liquidity are more likely to source their capital goods from foreign countries. Quantitatively, an improvement of the liquidity or leverage ratio by 10% increases the probability of importing capital goods by 3% to 5% respectively, independently of productivity. These findings are robust to alternative measures of foreign technology. The effect of leverage is also robust with respect to specifications dealing directly with reverse causality.
Access to finance ; foreign technology ; firm panel data ; INDIA ; INVESTMENT