Credit access and market access: the SME-Leader program

This paper shows that credit access is a key barrier to exporting. It focuses on the implementation of a unique credit guarantee scheme for SMEs (Small and Medium Enterprises) in Portugal between 2008 and 2014 — the SME-Leader program (programa PME-Líder). By exploiting firm eligibility for this scheme, the paper establishes a causal impact of access to finance on firm export dynamics. 

The paper finds that access to the credit guarantee and subsequent access to credit sharply increase the probability of exporting: qualifying firms were approximately 12% more likely to export than similar non-qualifying firms.  These firms also exported a wider range of products, reached more export markets and, overall, exhibited higher total export value. The impact of access to credit on exports was more pronounced compared to domestic sales during the sample period.

The results emphasize the role of entry costs of exporting and its financing as a key factor in explaining these effects. These are costs incurred by firms when entering a new export market, including dealing with regulatory barriers and adjusting product portfolio to meet foreign demand. These costs are substantial, especially for smaller firms.  Consistent with this notion, the paper finds that credit access has persistent effects: firms entering a market due to a positive shock to credit continue to export even after the shock dissipates, as they have already incurred the entry costs. Also, access to credit disproportionately impacts not-yet exporters and small, constrained firms that may find it harder to cover entry costs. After reporting on evidence suggestive of entry costs, the paper proposes two sources of these costs — trust-building and quality upgrading. It provides suggestive evidence that firms strengthen their supply chain networks, develop longer exporting relationships, and export higher quality products following access to credit.

Overall, this paper highlights the effectiveness of government guarantees in promoting trade. By significantly reducing lending risks for banks, government guarantees enable SMEs to finance export projects and establish themselves in foreign markets.

Click here to go to the paper by Claudia Custodio, Chris Hansman, and Bernardo Mendes.