Financial frictions can have relevant effects on firms' strategic decisions. Despite the relevance of this topic for economists and policy makers, we still have limited understanding of whether financial factors can shape the organization of firms' domestic and international activities.
This project aims to provide novel insights on how firms deal with financial constraints and the impact on international trade.
First, we will investigate firms' strategic responses to financial frictions. We will explore whether credit restrictions amplify the negative effects of the pandemic and test whether constrained firms plan to charge higher prices relative to their unconstrained counterparts. Then, we will analyze the impact of financial constraints on open innovation practices in small and medium-sized enterprises. Moreover, we will study how the interaction between political instability and credit availability affects firms' performance in developed and developing countries. Second, we will explore the link between firms' financial constraints and international activities. By analyzing a large sample of European firms, we will investigate whether firms exporting their production abroad and companies involved in global value chains are more likely to be credit restricted by banks. Finally, we will dig deeper into the international trade literature and investigate the relationship between firms' international activities and technological innovation. In particular, we will first examine how China's import competition affects Italian firms¿ product and process innovation and the mediating role of unions. Then, by adopting a country-level perspective, we will analyze whether technological infrastructures (internet connection) impact on firms' export decisions in both developed and developing countries.
On the top of the novel evidence brought by each of the listed projects, our work will innovate the literature in several substantial ways.
First, we will contribute to the literature on financial frictions and firms' strategic decisions by looking at the pandemic crisis. In particular, we ask whether credit constraints amplify or mitigate the shocks associated with the pandemic on firms' sales, employment, and investment. Most of the existing evidence on amplification is about monetary shocks or financial shocks. The COVID-19 event, instead, generates real shocks to firms' supply and demand conditions that originate outside the banking sector, and occur in the context of accommodating monetary policy. This allows us to investigate the amplification issue from a novel angle. Then, we plan to discuss how financial frictions affect firms' pricing strategies and open innovation practices. Regarding pricing strategies, there is an open discussion on whether financially constrained firms are more likely to charge higher or lower prices during a downturn. Our investigation can bring new evidence to bear on this debate. As for open innovation practices, most of the existing literature has focused on the effect of financial constraints on product and process innovation activities carried out within the firm. We will add to this literature by examining whether credit availability affect R&D collaborations in SMEs.
Second, we will add to the literature on conflict and firms' performance by using a novel and unique source of firm-level information. In our analysis, we will employ the largest existing firm-level dataset providing comparable information across 120 country and 10 years-time. Moreover, by combining our geo-localized dataset of firm's characteristics and the dataset on political instability and conflict events, we will be able to construct a firm-level specific measure of conflict exposure. This will allow us to properly account for the geographical dimension of conflict in the analysis of its effects on firms¿ performance and provide novel evidence on how different types of conflict-related negative shocks may affect firms' performance and how firms adapt to them. Finally, we will explore how different mechanisms may contribute to explain the effect of political instability and conflict on firms. By exploiting the rich set of information on credit access included in the Enterprise Survey, we will be the first to explicitly look at the effect of conflict on the firm's access to finance and how this may affect the way in which the firms adapt to the negative shocks to which they are exposed.
Third, we will enrich the literature on financial constraints and international trade by investigating whether firms with international activities are more likely to be credit restricted during a crisis. Despite the broad evidence on credit rationing during the last financial turmoil, no one has studied whether firms exporting their production and companies involved in GVC are more likely to experience credit restrictions during a financial crisis. On the one hand, information on foreign markets is difficult to obtain and hard to verify for creditors. On the other hand, firms involved in international networks, like GVC, may be perceived as more valuable and safer by banks. Trying to solve this theoretical dilemma may be especially relevant from a policy perspective, given the importance of both credit availability and internationalization for SMEs in Europe.
Finally, we will contribute to the literature on international trade and innovation. First, by investigating the impact of China's import competition on innovation and the role played by unions, we will provide new insights about firms' response in terms of innovation to import competition. To the best of our knowledge, no previous papers have investigated the interplay of imports, innovation, and unions all at once. Theoretically, firms might increase their innovation activity in response to an import competition shock. Nonetheless, from an empirical point of view results are not so clear cut. Second, by exploring how bilateral digital connectivity resulting from telecommunications submarine cable deployment affects firm participation in international markets, we will add to the literature on internet and international trade. More specifically, this project will be the first exploiting data on the bilateral SMC infrastructure to estimate the impact of improved digital connectivity between countries on their bilateral trade. SMC rollout coincides with the development of cheaper and faster telecommunications, including broadband Internet, spurring the digitisation of information and communication contents and the digitalisation of economic interactions. Our contribution here is the focus on the role played by bilateral SMC connections, the backbone architecture of the world telecommunications network, as a structural determinant of international trade flows.