"The effect of countries' risk on the choice of financial instruments for international trade"

Document Type : Scientific paper

Authors

1 Ph.D. Student,, Firozkuh Branch, Islamic Azad University, Iran

2 corresponding Author, Department of Economics, Islamic Azad University, Firoozkuh Branch, Firoozkooh,

3 Associate professor, Department of Economics. Alzahra University. Tehran, Iran

Abstract

Countries' risk in choosing the type of finance products in international trade is important. Firms can buy special trade finance products from banks, the most common of which are letter of credit (LC), cash in advance (CA) and open account (OA). Based on import’s data of Iran from 79 countries during the years of 1393-1396 and using the panel data econometric model, this paper explores the effect of rule of law in origin and destination as a measure of countries' risk on choice of finance products in international trade. The countries are divided into three groups: low risk, medium risk and high risk. The results in this study showed that. Letters of credit are employed the most for export to countries with intermediate rule of law (contract enforcement), and they are used for riskier destination than cash in advances. As countries' risk increases, the use of letter of credit increases, but this relationship is not linear, so firms use less letter of credit with high-risk countries and use more open account. In other words, the effect of countries' risk or the rule of law index on employed the "letter of credit" as one of the important finance products is "hill-shaped".

Keywords

References

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Macroeconomics Research Letter
Volume 15, Issue 30
January 2021
Pages 149-167

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History

  • Receive Date: 08 September 2020
  • Revise Date: 09 January 2021
  • Accept Date: 23 January 2021

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