Processing trade and credit constraints

We provide firm-level evidence that processing trade helps relax credit constraints on exports. We show that firms engaged in processing trade have better export performance than those engaged in ordinary trade in financially vulnerable sectors. The results are not driven by firm size, time, or other sector characteristics. The findings are consistent with the fact that processing trade is less credit-constrained due to its lower upfront costs and less working capital needs. Our findings highlight the importance of processing trade in firm exports, particularly in developing countries with imperfect capital markets.