Finance, Comparative Advantage, and Resource Allocation

Can financial institutions and markets enhance the discipline imposed by competitive product markets and thus improve resource allocation in the real economy? We address this question in the context of international trade, using disaggregated product-level data from seventy-one countries exporting to the USA. We show that exported products exit the US market sooner if they stand far away from the exporting country's comparative advantage. This pattern is stronger when the exporting country has a well-developed banking system, but it is unaffected by the depth of stock markets. These results are in accordance with theories stressing the disciplining role of debt and monitoring abilities of banks.