the competitive advantage of firms and their proximity to export finance centers

The Competitive Advantage of Firms
and their Proximity to
Export Finance Centers




by



Edward John Arnold

March 2008





A dissertation submitted to
the Faculty of the Graduate School of
State University of New York at Buffalo
in partial fulfillment of the requirements for the degree of

Doctor of Philosophy

Department of Geography, State University of New York at Buffalo


Advisor: Alan D. MacPherson, Ph.D.
UMI Number: 3307661
3307661
2008
Copyright 2008 by
Arnold, Edward John
UMI Microform
Copyright
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unauthorized copying under Title 17, United States Code.
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by ProQuest Information and Learning Company.

© Copyright by
Edward John Arnold
2008
ii

iii

Dedication Page


I dedicate this dissertation to:
My family. This would not have been possible if not for my wife Grazyna who supported
this effort from the start and made many sacrifices all along the way. Her loving
dedication to our family and me kept me on course and relatively sane through the
process. My two children Ashley and John who undoubtedly missed out on some time
playing outside with Dad but already seem to have developed an appreciation for
learning.

My brother Jim, sister Jenn, and brother-in-law Steve, although all younger, earned their
doctorates in their chosen fields before I started. Their success inspired me. My parents
whose wisdom and values I try to emulate and pass on to my own family.

Finally, my friends and relatives who have seen me less often and whose parties and
barbeques I have missed because I was working on some project for school.

iv

Acknowledgement

I thank my advisor Alan MacPherson whose intelligence, depth of knowledge, and
patience were critical to my successful completion of this dissertation. I also thank
Sharmistha Bagchi-Sen and Jessie Poon, who were on my committee and provided
valuable advice and support and my outside reader Richard Dietz, Senior Economist at
the Federal Reserve Bank of New York. I would like to gratefully acknowledge the help
of Seth Triggs and Donna Banach for their help with the maps and layout and Jim
McConnell who recruited me to the program and convinced me that it could be
completed. I enjoyed working with my fellow students; it was truly a pleasure working
with so many smart people. Finally, I offer my sincere gratitude to Kush Haq and David
Pritchard who completed their PhDs in Geography just before I started and encouraged
me throughout the entire process, offered advice, lent me books, and recommended
articles.

v

Contents

Dedication Page iii
Acknowledgement iv
Table of Contents v
List of Tables vii
List of Figures viii
Abstract ix

1. Introduction 1
Research context 3
Fundamental questions 5
Sources of data 8
Structure of dissertation 9
Chapter summary 10

2. Research context and literature review 12
Competitive advantage 12
Access to financing 13
Proximity 15
Face-to-face linkages 18
Dissemination of information 20
Measuring success 21
Transaction size 22
Complexity 23
Chapter summary 24

3. Institutional context 27
Ex-Im Bank 27
Institutional Context 28
Products 29

vi

Other Ex-Im Bank Programs 32
Chapter summary 34

4. Survey method 36
Hypotheses 36
Definitions and measurements 37
Data and methodology 42

5. Results from mapping 48
Chapter summary 77

6. Survey results 78
Chapter summary 86

7. Summary and conclusions 88
Major findings 88
Unexpected finding 91
Limitation of the research 92
Future research 94
Implication of the research 95
Summary 96

Appendix A: Survey of firms that did not use Ex-Im Bank 98
Appendix B: Survey of firms that used Ex-Im Bank 100
Appendix C: Disclosure statement 103
Appendix D: Sample letter to firms that did not use Ex-Im Bank 105
Appendix E: Sample letter to firms that used Ex-Im Bank 106

Bibliography: 107


vii

List of Tables

Table 1: Survey response rates 46

Table 2: All transactions and their proximity to trade finance centers 51

Table 3: Breakdown of number of transactions by trade finance center 55

Table 4: Working capital transactions and their proximity 59
to trade finance centers

Table 5: Medium term transactions and their proximity 60
to trade finance centers

Table 6: Average distances from trade finance center 64
by transaction size

Table 7: Median distances from trade finance center 64
by transaction size

Table 8: Size, intensity, and other measures 78
of export sophistication

Table 9: How firms first learn of Ex-Im products 81

Table 10: With whom exporters had face-to-face meetings 83

Table 11: Distance trade specialist travel to visit an exporter 84

Table 12: Correlations between export intensity, employment size, 85
and experience

Table 13: Hedging 86











viii

List of Figures

Figure 1. All Transactions 50
Figure 2. Transactions occurring in each category (not cumulative) 51
Figure 3. All Transactions With Distribution Count 54
Figure 4. Average Distance to Nearest Trade Center 58
Figure 5. Working capital transactions occurring in each category 59
(not cumulative)
Figure 6. Medium term transactions occurring in each category 61

(not cumulative)
Figure 7. All Working Capital Transactions 62
Figure 8. All Medium Term Transactions 65
Figure 9. Medium Term Transactions under $1 million 68
Figure 10. Medium Term Transactions under $5 million 69
Figure 11. Medium Term Transactions over $5 million 70
Figure 12. Medium Term Transactions over $20 million 71
Figure 13. Working Capital under $1 million 72
Figure 14. Working Capital under $5 million 73
Figure 15. Working Capital over $5 million 74
Figure 16. Working Capital over $20 million 75



ix
Abstract

This dissertation examines the impact of a firm’s proximity to a trade finance
center on its export success. The primary focus is on firms that have taken advantage of
financing from the Export Import Bank of the United States (Ex-Im Bank). The central
proposition behind the dissertation is that firms that are located closer to trade finance
centers are more likely to use trade finance products than those that are more remote, and
that firms that use trade financing are more successful exporters. Related data regarding
the diffusion of information pertaining to trade finance products, the importance of face-
to-face meetings in trade finance, and the impact of transaction size on the
proximity/usage relationship are also investigated. The data for the dissertation comes
from information on US exporters that obtained Ex-Im Bank financing in 2005, and from
surveys taken from exporters that used Ex-Im Bank financing and exporters that had not.

A number of important findings are uncovered that should be of interest to both

economic geographers and policy makers. First, by mapping out trade finance
transactions and comparing the results with population statistics, it appears that firms
located close to trade finance centers are more likely to take advantage to trade finance
products. Second, by comparing surveys of firms that use Ex-Im Bank financing and
firms that do not, we see that firms that have used export financing are much more
successful exporters. A third finding is that face-to-face meetings are very important to
both disseminating information on trade financing and in the establishment of the
financing facility. A surprising finding is that transaction size has a negligible impact on
a firm’s proximity to finance centers. It would seem reasonable to expect that banks
would travel further from the trade finance center to service larger transactions. However,
the results show that transaction size has little to no impact. Finally, it seems that firms
that used Ex-Im Bank financing not only have higher export intensities but they were are
also more experienced exporters, have been in business longer, and were more likely to
have used other sophisticated trade finance tools than firms that had not used Ex-Im
financing.

1


Chapter One


Introduction

The purpose of this dissertation is to analyze the usage of trade finance products among
United States exporters, and to determine if there is a geographic difference in usage of
trade finance products based on a firm’s proximity to trade finance centers. The study
also probes for connections between a firm’s success in exporting and the use of trade
finance products.

A two-pronged approach is taken to gather the information necessary to address these
issues. First, quantitative information is gathered on the number of loans made, the loan
size, and the geographic distribution of the borrowers in relationship to trade finance
centers. Second, survey information is gathered on individual exporters (both users of
specified trade finance products and non-users) to determine their success in exporting.
For the purpose of this dissertation, the study area is the United States and the year
studied is 2005.

Once the trade finance center locations are identified, a study of the geographic
distribution of trade finance transactions is undertaken. Export financing is often done
with support from Export Development Corporations (EDCs). These EDCs are
governmental agencies that provide guarantees to reduce the bank risks involved in
financing export transactions. Most developed nations have their own EDC designed to
encourage exports and provide financing to developing nations, and these EDCs typically
offer very similar programs. In the United States, The Export Import Bank of the United

2

States (Ex-Im Bank) serves that function (Hill, 2003). This dissertation uses companies
that have taken advantage of Ex-Im Bank finance programs as a proxy for firms that use
trade finance products. Private sector banks work in conjunction with Ex-Im Bank on
these transactions.

According to Ex-Im Bank’s 2005 annual report, Ex-Im Bank programs supported only
about 2% of total US exports in 2005 or approximately $17,834,000,000 (The Export-
Import Bank of the United States, 2006). While this dissertation uses companies that have
taken advantage of Ex-Im Bank finance programs as a proxy for all firms that use trade
finance products, it is important to recognize that the majority of US exports are self
financed.

Comparing the geographic distribution of these export finance transactions with the
location of trade finance professionals should reveal intuitively a relationship between
proximity to trade finance professionals and the likelihood of a firm taking advantage of
trade finance services. Should there be a difference in usage of trade finance products
based on a firm’s proximity to trade finance professionals, then the sensitivity of that
difference to transaction size would warrant exploration. It would seem intuitive that a
company on the periphery seeking a small export working capital loan ($100,000-
$1,000,000) might have a hard time getting a trade finance professional from a banking
center to get on a plane and visit their company, whereas large multinational corporations
such as Boeing or Caterpillar would have no problem getting international finance
professionals to call on them regardless of location.


3

Research Context

Many banks offer various levels of trade services such as letters of credit and currency
exchange services, but there is a higher degree of complexity and sophistication required
for banks to actually loan money to support export transactions. This financing includes
working capital loans made to the exporter, loans to foreign buyers (to purchase US
exports), and project financing overseas. The level of complexity involved in these
transactions demands both face-to-face meetings and local knowledge, thereby
eliminating the ability to fully service any customer anywhere by electronic means
(Gehrig, 1998). This study focuses on trade finance rather than trade services. The later
typically include letters of credit, standby letters of credit, wire transfer services, and in
some cases currency exchange products.

Due the relatively low volume of trade finance loans compared to more standardized
products like mortgages, letters of credit, or currency exchange products, there are
relatively few trade finance professionals located within banks (www.exim.com
, 2007).
These trade finance professionals tend to be concentrated within banking centers and
larger markets. For the purpose of this dissertation, a trade finance center is a city in
which several trade finance professionals are located.

As discussed above, the complexity of trade finance products increases the likelihood that
a trade finance professional and the exporting firm has at least one face-to-face meeting
to identify the need, structure the loan product, and get comfortable with the export
transaction and the performance risk of the exporter. It is also important that the exporter
understands how the financing works. Buyers (2003) demonstrates that the need for face

4

to face interaction between business service providers and their clients varies directly
with the complexity or potential ambiguity of the information that needs to be exchanged.

Since personal contact is an important element in disseminating information on export
finance products, qualifying potential customers, structuring loans and developing a
comfort level between bank and exporter, it is most common for the export finance
professional to travel to the customer. It would seem probable that the more often a trade
finance professional is within close proximity to a firm, then the more likely the firm will
be aware of the export finance products. It will also be easier (in terms of time, travel,
and opportunity costs) for a trade finance professional to visit a customer who is in close
proximity than one who is far away.

Since we are looking at government supported export financing, there may be policy
implications of the results of this research. Ex-Im Bank and the US Government have a
responsibility to provide US firms with equal access to federally supported financing
programs, regardless of geographic location. If usages of these programs are unequally
distributed across regions or cities, then perhaps additional efforts might be needed to
reach under-served areas.

This study also tests whether there is a connection between a firm’s success in exporting
and the use of trade finance products. The purpose of Ex-Im Bank’s trade finance
programs is to support U.S. exports. By comparing the success in exporting of firms that
use Ex-Im Bank financing with the export success of firms that do not, the effectiveness
of Ex-Im Bank’s programs and the overall premise that proximity to export finance

5

professionals contributes to a firm’s success in exporting can be tested. In short,
proximity may provide a competitive advantage.

Fundamental Questions

1. Does proximity to trade finance professionals increase the likelihood of the

use of trade finance products?
This is one of the fundamental questions of the dissertation. A goal of this research is to
determine if firms that are located in the same geographic area as trade finance
professionals are more likely to use trade finance products.

There are relatively few banks that are truly considered international finance banks.
These banks have a small number of trade finance professionals that meet with customers
to sell their trade finance products. These professionals are usually concentrated in major
banking centers. This dissertation will attempt to determine if firms that are located near
trade finance centers are more likely to use these products.

2. Are face-to-face meetings important between trade finance professionals and
firms using trade finance products?
Many have argued that face-to-face meetings are less important in these days of
telecommunication and instant access to information via computers. The importance of a
firm’s proximity to trade finance professionals depends largely upon the need for face-to-
face meetings between the trade finance professional and the firm.


6

This study tests whether the complexity of trade finance transactions requires face-to-face
meetings, as opposed to more common banking functions that can be handled online or
via faxes and e-mails. The complexity of these products may require more explanation on
both the firm and the banks part. In addition, the new buzz word in the export finance
community is “KYC” (know your customer). The level of comfort between bank and
firm may still demand face-to-face meetings.

3. How is information about trade finance products disseminated?
Are trade finance professionals the main source of information on the products they

promote? These products are targeted to a very narrow market (Chief Executive Officers
(CEOs) and Chief Financial Officers (CFOs) of exporting firms). There is potential to
reach the target market through advertising in business newspapers, trade magazines,
targeted mailings, radio, and the internet but this dissertation will test the premise that
most companies are reached through trade finance professionals directly, the staff of Ex-
Im Bank, or their regional partners who promote the products directly to the users
through face-to-face meetings and speaking at trade functions.

4. How does technology impact the relationship between proximity to trade
finance professionals and usage of trade finance products?
Recent advances in banking technology have made proximity less relevant for certain
types of transactions. Information on bank products, applications, and other
documentation is readily available online for most of the common banking products.
Theoretically, this streamlines the process for both the bank and the customer and makes
geography irrelevant to the transaction. Banks can service customers from anywhere, and

7

there does not have to be any direct human contact between banker and customer. Is trade
finance different or specialized enough to counteract the geography neutralizing effects
of communication and technology advances?

5. Is cost an important element in the proximity/usage relationship?
Trade finance professional located in trade finance centers typically have large territories.
When a banker in New York City hears of a potential trade finance loan in Manhattan,
there is a cost of visiting that customer. The cost could include a taxi fare and a few hours
of time. If the customer is in Olean, NY, then the cost might include airfare, a rental car,
and a full day of travel for a single meeting. It is possible that the customer in Olean is
the only good prospect in that area to meet with, whereas there may be several within a
city block in Manhattan.

Clearly, for a New York City trade finance professional the cost of visiting a potential
customer in Manhattan is less than the cost of visiting a potential client in Olean, NY.
Will a banker be as willing to visit the Olean customer, as he/she is to visit the customer
in Manhattan?

6. Is the proximity/usage relationship sensitive to transaction size?
This question relates to the previous question regarding costs. If it costs more to service a
customer in Olean versus a customer in Manhattan, then the size of the transaction
becomes important. A bank would gladly travel to Alaska or Wyoming to do a $100
million transaction, but what about the smaller deals? Is it more difficult to get a

8

$300,000 export working capital loan in Olean than in Manhattan? This dissertation will
attempt to address that question.

7. Are firms that take advantage of export finance products more successful
than other exporters?
Governments around the world have created programs to support exports through
finance. Are firms that use export finance products better exporters? This thesis compares
exporters that use Ex-Im Bank trade finance products with exporters that do not, and
attempts to ascertain if there is a difference between the two with respect to export
success.

Sources of Data
The data for this research came from several sources. A database including all Ex-Im
Bank loans made in 2005 was obtained after requesting the information under the
Freedom of Information Act. This data included all Ex-Im Bank transactions in 2005, the
name and address of the exporter, contact name, the size of the credit facility, the country

the export was destined for, and the type of transaction. This information was used to
plot out trade finance transactions and determine their proximity to trade finance centers.
This database was also used as a mailing list for the survey of Ex-Im Bank product users.

Information on where trade finance centers where located came from three sources. First,
the Export Sourcebook provided a list of banks that were users of the Ex-Im Bank
program, information on the number of transactions each bank participated in, and the
size and the type of finance product used. Second, the Ex-Im Bank website provides a

9

lender referral list, which enables each lender (trade finance professional) to be
geographically located within a given bank (not all export transactions are handled at a
given bank’s headquarters). Finally, this information was cross-referenced with a list
containing details of transactions by State located on the Ex-Im Bank website.

Information on firms export success and how information on export finance products is
diffused was gathered by two surveys. The first survey was sent to exporters that used
Ex-Im Bank trade finance products (taken from the data base of 2005 Ex-Im Bank
transactions), and the second was sent to firms that had not used Ex-Im Bank trade
finance products. The second list of exporters was taken from a random sample (both in
terms of firm size and geographic distribution) of exporters that have been exporting for a
year or more (complied by Dunn & Bradstreet for the express purpose of this
dissertation).

In accordance with university policy, this dissertation does not disclose the names of any
companies surveyed but uses all the information gathered in aggregate. No financial
information on any specific company is provided other than that of the Export Import
Bank of the United States, which is a federal agency.

Structure of the Dissertation
Following the first chapter, the next chapter contains a literature review and research
context. Chapter two also looks at how firm size, proximity to source, and complexity of
information impacts lending trends and the diffusion of information and assesses other
relevant information to the context of this study. Chapter three reviews the origin and

10

structure of the Export Import Bank of the United States and the context in which it
currently operates. The third chapter also reviews the financial products that this
dissertation focuses on, how they are used, and the function they perform. This chapter
also describes other Ex-Im Bank products that were not considered in the study and
explains why. The fourth chapter outlines the survey method. Chapter five presents the
empirical results from the Ex-Im Bank data and the mapping exercise. Chapter six
presents the results of the two surveys. The seventh and final chapter provides a summery
and conclusion. Here, the key findings of the dissertation are identified and put into the
context of the purpose of the dissertation and their possible wider contribution. Future
research opportunities are also identified and discussed, along with the key limitations of
the dissertation.

Chapter Summary
There is very little within the literature on economic geography that deals with export
finance, proximity to finance centers, or measures of export success for firms using trade
finance tools. This dissertation looks at all these things. By plotting out the Ex-Im Bank
transactions on a map of the United States with trade finance centers identified, an
accurate view of the dispersion of these loans is obtained. The goal is to see if proximity
to these trade finance centers is linked with greater usage of trade finance products. The
survey of exporters using trade finance products and those that do not provides
information on which of the two groups has more success in exporting. A central
expectation is that the relationship between proximity to trade finance centers and usage

of trade finance products is positive. It is also expected that the relationship between
usage of trade finance products and export success is positive. Overall, the dissertation

11

tests the general proposition that there may be a competitive advantage in being located
near a trade finance center when exporting.

The dissertation also investigates the role of firm size on the effect of proximity to trade
finance centers and the likelihood of using trade finance products. The study examines
how information about trade finance products is dispersed and how necessary face-to-
face meetings are in the process of promoting the loan programs and getting the
paperwork completed.




12

Chapter Two

Research Context and Literature Review
Competitive Advantage
There are multiple sources of competitive advantage that differ widely between industries
and the natures of these advantages vary just as widely (Porter, 1990). Products differ
widely and competitive advantage can be based on more than just cost advantages
(Porter, 1990). This dissertation focuses on the external competitive advantage firms
realize through access to trade finance products.

When evaluating national competitive advantage, many scholars have linked access to

financing with competitive success. Wade (1992) describes how government supported
export finance initiatives contributed to East Asia’s economic success. Holden (1996)
attributed America’s increasingly negative trade balance to the United Sates failure to
ensure the competitiveness of Ex-Im Bank’s loan programs with those of agencies in
Japan and Europe, which offer greater export incentives. The Congress even claimed that
the other OECD competitors were gaining advantage by offering extraordinary support
(subsidized, below market long-term interest rates).

Several researchers see that the US is at a competitive disadvantage because other
developed nations have more aggressive government supported export finance programs
that effectively reduce demand for US capital goods in developing countries and increase
price sensitivity (Holden, 1996; Hickok and Hung, 1992; Kasman, 1992).


13

On the regional and firm level, Levine (1997) argues that financial institutions and
markets shape and are shaped by patterns of economic growth. Financial markets are
attracted to areas of growth and their presence spurs on economic growth. Historically,
there has been a positive relationship between financial development and industrial
development. Studies have shown that the US, German, and Swedish domestic industries
were driven by financial markets in those countries financing domestic industries from
the 1860s on (Cameron 1992 a-c). Blackburn and Hung (1996) demonstrated that
financial intermediation (banking) is directly related to economic growth.

Access to Financing
There have been several articles written about the difficulties that small firms face when
it comes to accessing financing, as well as the detrimental effects of not securing external
financing (Bolton Committee, 1971; Storey, 1994; Bank of England 2002; Pollard, 2003).
There have also been a number of studies that document the role of access to money and

financing on a social level and its impact on economic development. These studies have
shown the negative impact on business, entrepreneurship, and economic development on
geographic areas where there is little or no access to financing (Clark 2000; Harvey,
1973, 1982, 1989; Leyschon and Thrift 1995; Martin 1999; Mason and Harrison 2002;
Pollard, 2003).

Leland and Pyle (1977) write that capital is an essential element for firms and that it is a
resource that is unequally distributed. Uncertainty and market realities do not convey
perfect information to sources or users of capital. The difference between buyers and
sellers are particularly acute in credit markets, as the borrower nearly always has more

14

information about collateral and business strength than the lender (Leland and Pyle,
1977). This is a reason why considerable effort needs to be taken by the lender to
ascertain as much information as possible about the borrower and his/her collateral. An
important element of due diligence is face-to-face meetings and company visits.

Gertler (1984) looks at five commonly held conceptions (misconceptions) about capital
and calls them the ‘five cannons of capital’. He challenges these cannons and finds
substantial problems with each. The cannons are as follows:

1. Investment capital is perfectly mobile in space; hence, equally accessible
anywhere within a given developed country.
2. Geographic differentials in the cost of capital are non-existent or insignificant,
reflecting only the minimum transportation costs to the location in question.
3. Regional rates of investment bear little relationship to regional rates of saving.
4. Capital is allocated by its price (interest rate) and flows to the highest available
return.
5. Physical or fixed capital is virtually immobile in space, once installed, and exerts

a positive inertial force on subsequent flows.

Gertler (1984) notes that information technology and institutional innovations have
greatly enhanced the ability of capital to flow within large developed countries, bringing
greater balance between areas with surplus capital and regions with low supply. Citing
evidence from several sources, he concluded that there are still regional differences in
interest rates.

15


Lösch (1954) was the first to take central place theory and apply it to banking. He looked
at 20 major banking centers around the United States and gathered information on
interest rates from 1919 to 1930. Lösch observed that the further one traveled from New
York City the higher the interest rates, yet even with the higher interest rates, there was
still friction that limited the flow of capital from New York City to more remote places
traveling over physical distance and overcoming a lack of local knowledge.

Gertler attributes past and continuing consolidation within the world of finance to a
greater unevenness in access to financing. This consolidation has a greater impact on
regions in the periphery and on smaller specialized banks or brokers (Gertler, 1984).

Proximity
Firms like all other forms of social organization are fundamentally and intrinsically
spatial and territorial. They are spatial in the sense that they are responsive to geographic
distance and to variations in the availability of necessary resources and business
opportunities. Firms are territorial as well as spatial in the sense that the ‘surface’ from
which firms originates and on which they operate is most commonly made up of a
tessellated structure of territorial entities arrayed along a continuum of variable and
overlapping scales (Dicken and Malmberg, 2001).

If Dicken and Malmberg are correct, then surely “availability of necessary resources”
would include financial resources, as is argued in this dissertation? Becattini (1990)
asserts that on a regional scale, firms operate in financial networks that shape their access