firms positively affects export decisions. Another more recent study, **?** uses cross section of firm level data across 9 developing countries and they find that access to finance is important to the firm’s decision to enter exports. Furthermore, they find that financial constraints create a disconnection between firms’ productivity and their export status: productivity is only a significant determinant of the export decision if the firm has a sufficient access to external finance. While the existing empirical work show that there are significant relationships between exporting and financial factors, neither studies relate these empirical findings to a model that explains the underlying economic relationships that drive these results.

# **3 Why might working capital restrictions affect exporting decisions?**

The Bangladesh Investment Climate Assessment 2002 surveyed 990 firms and collected annual recall data for 2000 and 2001 for key variables, except for access to finance questions that are only reported for 2002. A total of six manufacturing industries are represented: Garments, Textiles, Food, Leather, Electronics and Chemicals. The distribution of firms within each of these industries is representative of the composition of the Bangladeshi economy, with 57 percent of the observations in the garments and textiles industry. The data set contains financial information that allows working capital to be measured at the firm level. Working capital is defined in the data as the sum of inventories, accounts receivable and cash on hand.<sup>6</sup> Working capital can be thought of as current assets or the liquidity of the firm. A unique characteristic of the data set is that it contains country destinations of exports. This allows us to look at whether the distance to country destinations is correlated with working capital at the firm level.

There are three major observations from the data that indicate working capital is particularly important for exporting. First, there are substantial additional costs to exporting in the form of custom duties and procedures. Table 1 shows that average official costs are 84,935 takas (approximately $1,456 USD) and average unofficial costs total 32,895 takas (approximately $564 USD). In light of the average value of exports is only 139,981 takas (approximately $2,399 USD), total custom costs are a substantial cost to firms in Bangladesh. In addition to these costs, exporting firms also hire clearance agents to help get them through customs -around 90% of exporting firms use a clearance agent at an average cost of 0.82% of the value of the freight. These costs plus the time delays in customs would require the firm to have adequate working capital in order to just get their goods through customs.

Second, exporters do not get paid until their goods are delivered to the export destination for a much larger proportion of their sales than non-exporters. Table 2 shows that on average, 89 percent of the sales for exports is paid upon delivery (median is 100 percent) compared to 65.74 percent for non-exporting firms (median 75 percent).<sup>7</sup> Therefore, exporters would require to cover a greater percentage of their costs with their own working capital than non-exporters. Furthermore, the longer the time period is between production and delivery, the greater the amount of working capital is required.

Last, delivery times are longer for exporters than non- exporters. Turnover time differs from industry

> 6Working capital is measured according to the accounting definition: current assets (inventories, accounts receivable, cash and shortterm credit) minus current liabilities (accounts payable and any short-term debt). Note that working capital data is only reported for 2002

> 7A proportion of sales is also bought on credit, and here, non-exporting firms appear to extend more credit than exporting firms. Extending credit to customers would further delay the receipt of revenues from when the cost of production was incurred. On average, amongst those that do extend credit to customers, 43.77 days of credit is extended with a median of 30 days. This is funded mainly from retained earnings ( median of 60%, with the rest from micro lenders or informal lenders). This implies that those firms that extend credit to their customers are doing so because they have enough cash or access to finance. They charge their customers extra for the credit for the delay in the receipt of payment and the delay is not crucial for completing the exchange. Unlike the delays caused by shipping across large geographical distances which are unavoidable and crucial to completing the transaction between the exporter and the customer.

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