CEPII, Recherche et Expertise sur l'economie mondiale
The Decision to Import Capital Goods in India: Firms' Financial Factors Matter

Maria Bas
Antoine Berthou

 Highlights :

 Abstract :
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.

 Keywords : Access to finance | foreign technology | firm panel data | INDIA | INVESTMENT

 JEL : F10, F14, D24, D92
CEPII Working Paper
N°2011-06, March 2011

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