Financial constraints, institutional quality and import trade flows: An empirical investigation on Italian manufacturing SMEs

Abstract

This work investigates the relation between local institutions and international business, considering the Italian manufacturing industry and SMEs’ import trade flows between 2015 and 2019. In detail, we test the hypothesis of whether courts’ inability to enforce contracts can amplify uncertainty on the market, discouraging foreign suppliers from performing international transactions. We interpret these expectations in terms of financial constraints, imagining that the quality of a legal system limits firms’ access to local financial resources, which are essential to guarantee such operations. The proposed hypothesis is assessed considering alternative explanations that might characterize importers: absence of ex-ante business networks on the global market (i), expected bankruptcy risks (ii) and asymmetric information (iii). Results are consistent to several robustness tests and, according to the collected evidence, we cannot reject the hypothesis that judicial quality might represent an institutional barrier to local SMEs, preventing their international business strategies.