Finance, Comparative Advantage, and Resource Allocation

The paper examines the interplay between financial development and comparative advantage in shaping the survival of exporting firms on foreign markets. Exports suffering from comparative disadvantage (labour-intensive products from capital-abundant countries) survive shorter on the competitive US market. Crucially, the pattern is stronger if the exporting country has a well-developed banking system. This suggests a positive role for finance in pushing the manufacturing sector towards export composition congruent with the comparative advantage of a given country. A strong financial sector can thus mitigate misallocation of resources arising from inefficient exporting patterns.