Financial Constraints, Firms’ Supply Chains, and Internationalization

Using a unique sample of small and medium-sized Italian firms, we investigate the effect of financial constraints on firms' participation in domestic and international supply chains. We find that firms more exposed to credit rationing and with weaker relationships with banks are more likely to participate in supply chains to overcome liquidity shortages. This benefit of supply chains is especially strong when firms forge ties with international trading partners and when they establish long-term relationships with large suppliers. To control for possible endogeneity of firms' access to credit, we construct instruments capturing exogenous shocks to the structure of the Italian local banking markets.