The results of the export working capital model of the firm show that the export decision of the firm is determined by both productivity and working capital. The model exhibits the characteristic results of **?** in heterogeneous firm models of export, where exporting depends on productivity but also highlights the fact that this only occurs if the firm is not financially constrained. The working capital model shows that under financial constraints, the lack of working capital can yield different export outcomes even if the firm is productive enough to export. Liquidity constraints can constrain export potential firms to not export and/or export less than 100 percent. Therefore, the correspondence between productivity and exporting is much weaker.

# **5 Empirics**

This section examines empirical evidence in support of the model. First some stylized facts are presented: 1) the most productive firms do not necessarily self select into exporting and there does not appear to be a productivity cut-off above which all firms export, 2) significant differences exist in physical and working capital between exporters and non- exporters even within the same industry and 3) access to finance differs significantly between exporters and non-exporters and credit does not appear to be allocated according to productivity.

The Bangladeshi data set allows two key aspects of the model to be empirically tested: a) whether the export status of the firm is determined by both productivity and working capital and that their effects depends on whether the financial constraints are present, and b) whether there is a relationship between working capital and the export distance.

## **5.1 Stylized Facts**

### **5.1.1 Productivity of exporters and non-exporters in the data: Self-selection not evident**

Productivity is measured as total factor productivity estimated according to **?** as the method allows for more generally plausible assumptions as to the dynamic data generating process of the inputs used to estimate the production function.<sup>19</sup> A possible caveat to estimated productivity is that estimates of the production function with a large proportion of financially constrained firms could potentially underestimate factor coefficients as firms are not operating at optimal scale. This potentially could bias the size of the TFP estimate but not the distribution of tfp overall. However, the consequences of estimating production functions with firms operating sub-optimally is not clear and is left as possible future research.

The dominant trade theory at the firm level ( **??** ) predicts that, within each industry, the firms at the upper distribution of productivity above a certain cut off will export while those that are below will produce only for the domestic market. Trade liberalization induces a self-selection of the most productive firms into exports. However, this self selection is not evident in the data and it does not appear that export firms are necessarily the most productive. Figure 5 on the next page shows the distribution of productivity for exporters and non exporters in each industry.<sup>20</sup> If there is evidence of self selection, the productivity levels of exporting firms

> 19TFP was also calculated using OLS, RE, FE and using the **?** method. The OLS estimate suffer from endogeneity issues and both fixed effects and random effects estimates relies on strong assumptions on _ωit_ and has not worked well in practice. The LP estimates relies strictly on specific assumptions on the data generating process of the inputs to production that may not hold generally (see **?** ) and is prone to suffer collinearity. See Appendix A.1 on page 25

> 20Furthermore, Table 12 in Appendix A.2 shows that the median productivity level do not substantially differ between exporters and non-exporters and, in fact, shows that mean productivity is higher for domestic firms than for exporting firms in all sectors except for Leather and Chemical.

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