exports volume, protectionist agenda or limited competition a set of control variables are included: exporter c share in EU imports of product k in the year 2000 (one year before the sample start) (Imp_share<sup>EU</sup> ck<sup>),thead-valoremequivalentoftheEU’sMFNtari¤</sup> on product k; (tariffk)<sup>4</sup> , a dummy variable indicating whether product k is a¤ected by a quota during the sample period (quotak), a dummy variable indicating whether product k has been the object of a dispute at the WTO between the EU and any other country (disputek). Including a dummy variable indicating whether exporter c is a¤ected by a ban on product k during the sample period controls for decreases in the incidence of noti...cations resulting from reduced imports rather than reduced risk (banck). The initial value of EU imports of product k in the year 2000 (totimport<sup>2000</sup> k ) is included, as products imported in large volumes are likely to be inspected–and therefore, fail inspections–more often than others. Finally, the inclusion of a country ...xed e¤ect �c; controls for all supplier’s characteristics that may a¤ect the quality of the product– including overall economic development.<sup>5</sup> Because the number of noti...cations is a count, estimation is by Negative Binomial–alternatively Poisson.<sup>6</sup> In this set up, the product dummy captures the share of alerts due to product characteristics after controlling for exporters’characteristics and other variables that may a¤ect the probability of being rejected. A high risk index re‡ects a high sensitivity to food safety regulations. Since, rejection occurs when a product does not comply with food safety requirements as set in the regulation, the index can be interpreted as the gap between standard and actual product quality. "Risky" products are products far away from the standard. The gap deepens if the regulation is changing and/or if current production technologies do not allow to reach adequate quality. As a consequence, laying far away from the standard, leaves ...rms with two options, either conform or drop the market. As shown in section 2.2, compliance is a lengthy and costly process. Thus, for complying ...rms, the risk index captures the need for capital to conform with EU markets food safety requirements, and acts as a proxy for product ...nancing needs. In the remainder of the paper we refer to our measure of ...nancing needs as the risk index. Here, risk should be understood as the risk of su¤ering alerts.

We now brie‡y discuss some important features of the index. First, to our knowledge, there is no available measure of ...nancing needs at the product level<sup>7</sup> . As explained in

> 4We take tari¤s data for the year 2005.

> 5Even though we control for a potential protectionist agenda of the destination markets and for the exporting country time invariant characteristics, our index may still su¤er from omitted variable bias. The limited time span of our data on alerts does not allow us to estimate the risk index controlling for time invariant sectorial characteristics speci...c to the exporting country.

> 6A Poisson would give similar results, as the consistency of second-stage estimates does not depend on the correct speci...cation of the ...rst-stage equation. In addition, we have over dispersion and little excess of zeros in the sample. The negative binomial is to a reasonable extent adequate in tackling both problems. However estimation using zero-in‡ated negative binomial could be a good alternative.

> 7In Bricogne et al. (2010), the authors compute an external ...nance dependence measure –akin to Rajan and Zingales (1998) –at the HS2-digit level.

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