within sectors, productivity does not affect export status at all -regardless of whether firms are constrained or not.

In the first and second regression, without sector dummies, the productivity coefficient is large and highly significant, in accordance to theory. The coefficients for the interacted productivity and financial constraint is substantially sized, and only significant in the regression with additional controls. The estimates with additional controls resonates more due to specification and better fit. The results from regression (2) suggest that productivity matter less to the export status of financially constrained firms than unconstrained firms, but the effect does not completely negate the effects of productivity.

Looking at the estimates overall, results provide support for the model’s predictions that the effects of working capital and productivity will differ between financially constrained and unconstrained firms. Intuitively, working capital matter more for financially constrained firms, and productivity matters less when

# **6 Conclusion**

Empirical evidence suggests that, particularly in developing countries, financial factors matter for exporting. Extending firm trade models to include dynamic borrowing constraints points to the importance of working capital, as well as productivity for determining the decision to export, the percentage of output that will be exported and its destination. As such, the working capital model adds an important caveat to the established literature on the relationship between productivity and the export decision of the firm. Testing this model empirically with a unique data set from Bangladesh supports the proposition that working capital and productivity affect export status of the firm and their effects are differentiated by financial constraints. Empirical results also confirm the relationship between working capital and the distance to export destination. The empirical results provide support for the model’s predictions that the effects of working capital and productivity will differ between financially constrained and unconstrained firms. Specifically, for financially constrained firms, productivity matters less than for unconstrained firms while working capital matters much more. The correlation between working capital and export distance is shown empirically to be positive and significant, lending support for the working capital model of the firm’s export decision.

There are many exciting directions future research in this area will need to explore, both at the micro and macro level. On a macro level, the partial equilibrium model of working capital of the firm can be incorporated into general equilibrium models to look at the propagation of the effects of financial constraints across the economy and across countries. Further research and exploration into the dynamic interaction between the financing needs due to time delays and the financial structure of countries has the potential to add insights to international trade patterns. The distortion that financial constraints introduce to the self-selection of the most productive firms into exporting warrants further investigation as to how this may affect overall industry productivity and thereby the aggregate growth of the economy. In terms of theories of development, if the results of the model are drawn analogously for an economy represented by a single firm, this could potentially prescribe a development path where trade liberalization may play a very minor role at low levels of wealth. This may provide further impetus for developing countries to move quickly in the development of functioning financial systems that allocate financial resources closely in line with productivity and the availability of short-term credit and trade credit so that the most productive firms enter exports, and aggregate industry productivity improvements can be reaped from trade liberalization.

On the micro level, the working capital model exhibits distortions to factor ratios (also see **?** ) and this 23