Document Type : Research Paper

Authors

• Reza Asadi ¹
• Farzad Karimi ²
• Saeid Aghasi ³

¹ PhD Student in Financial Engineering, Department of Management, Dhg. C., Islamic Azad University, Dehaghan, Iran

² Associate Professor of International Economics, Department of Management, Mo. C., Islamic Azad University, Mobarakeh,Iran

³ Assistant Professor of Management, Department of Management, Dhg. C., Islamic Azad University, Dehaghan, Iran

Abstract

 In recent years, as the interdependence of different markets has increased, the level of financial risk of developing countries exporting industrial goods has increased. The main objective is to assess the extent to which industrial exports of these countries are affected by country financial risk and its components in comparison with traditional factors of bilateral trade such as economic size, real exchange rate, common border, and distance. In this paper, panel data for the period 2022 to 2002 are used within the framework of the Gravity Model and Pseudo-Poisson Maximum Likelihood (PPML) method. According to the findings of this study, the country financial risk conditions of developing countries have the greatest impact compared to other classic factors of bilateral trade. This study also showed that among the determinants of country financial risk, with the exception of external debt risk, reducing current account risk, service debt, exchange rate stability, and international liquidity risk leads to growth in industrial exports of developing countries. Therefore, an approach to assessing country financial risk and its effective management is crucial for developing countries exporting industrial goods. Thus, it is suggested that policies for managing these risks, including identifying them, assessing their impact on trade, prioritizing them, and developing measures to overcome them, should be on the agenda of export planners and policymakers in developing countries to minimize the negative impact on exports and prevent the negative impacts in the future.
 
Introduction
Currently, high correlation between different markets, increasing unilateralism and trade protectionism of developing countries have led to the spread of risk and uncertainty in these countries. One of the risks threatening industrial exports is country financial risk, which arises from fluctuations in exchange rates and government debt, affecting trade budgets and profitability. This category of risks represents an important hidden transaction cost and determines the flow of international trade in bilateral or multilateral industrial goods and therefore should be considered in any empirical model of international trade. The country financial risk considered in this study is a measure of a country's ability to meet its financial obligations at the international level. The country financial risk index is a combination of external debt risk, external service debt, current account, international liquidity and exchange rate stability. The main issue of the article is to identify the degree of influence of developing countries' industrial exports on country financial risk and its determining components in comparison with other factors affecting the exports of this group of countries.
Given that so far the discussion of the effect of country financial risk in the industrial export model has been very limited, and also the research conducted with an approach that has focused only on one of the country risk factors; therefore, the present study, in addition to examining the effect of country financial risk, also examines the importance of each of its determining components on the industrial exports of developing countries in comparison with other classic factors determining industrial exports. The result of this study can provide more effective and useful decision-making areas for developing countries that have always faced various types of deterrent risks in the course of international exchanges in the last four decades.
The present study can contribute to the discussion of decision-making in the field of industrial exports of developing countries from three perspectives: First, the factors affecting developing countries’ exports, especially from the perspective of country financial risk and at the industry sector level, are identified and a model for the development of industrial exports of these countries is presented. In fact, the industrial export model of developing countries is identified and explained by considering country financial risk along with other determinants of bilateral trade. Second, based on the latest available domestic and foreign studies that have emphasized traditional influential factors, such as economic factors, supply and demand factors, and distance on industrial export patterns of developing countries, the impact of country financial risk on industrial exports remains largely unknown. However, many researchers argue that country risk, such as financial risk, is a key factor that should be considered with regard to international trade policy. Third, the impact of developing countries’ financial risk in terms of each of its determinants is also considered. The results of these assessments will ultimately provide the basis for a more realistic analysis of the selection of important and influential drivers of industrial exports in developing countries.
Methods and Material
In the present study, based on the modified Gravity Model of Anderson and Van Wynkoop (2003) and also based on the aforementioned empirical studies such as Kai et al. (2022) and Jahanbakhsh Pour-Jabbari et al. (1402), the proposed Gravity Model is presented in terms of the financial risk index and separately for each of its constituent components as equations (2) to (7):
Model (2) assesses the impact of the country's financial risk index (FRR):
 
Model (3): for assessing the impact of the external debt risk index (fd):
 
Model (4): for assessing the impact of the external debt service risk index (fds):
 
Model (5): for assessing the impact of the current account risk index (ca):
 
Model (6): for assessing the impact of the international liquidity risk index (nil):
 
Model (7): for evaluating the impact of the exchange rate stability risk index (ers):
 
In models (2) to (7), t represents the year, i denotes the country of origin (exporter of industrial goods), and j denotes the country of destination, v_i and u_j with country fixed effect and δ_t is the period fixed effect and ε_ijt is the random error. Also, the variable xcdv is the value of industrial exports of developing countries. As mentioned, the country financial risk of this study is a measure of a country's ability to fulfill its financial obligations at the international level. The country financial risk index (FRR) variable is a composite index that evaluates five financial variables, namely the external debt risk index (FD), the external debt service risk index (FDS), the current account risk (CA), the international liquidity risk (NIL) and the exchange rate stability risk (ERS) and their associated risk points. The range of the indices varies between zero and 50; the closer the index is to zero, the higher the risk, and the closer it is to 50, the lower the risk. To ensure comparability between countries, the components are based on the accepted ratios between them. In general, a financial risk index of 0.0 to 24.5 percent indicates very high risk, 0.25 to 29.9 percent high risk, 0.30 to 34.9 percent medium risk, 0.35 to 39.9 percent low risk, and 0.40 percent or more very low risk. Information on the country financial risk index and its determinants was purchased from prsgroup.com. The raw data is monthly and is used in this study after averaging.
Results and Discussion
The results indicate that, in the medium term, unlike the long term, financial risks in developing countries are growing, which affects the development of industrial exports. Another point to be examined is that, at the same time as the country's financial risks increase, the growth of industrial exports has also become lower than the long-term industrial export growth rate. During the study period, the growth of industrial exports was 17.3 percent per year, significantly lower than the long-term growth rate of 67.9 percent. The distribution of industrial exports of developing countries in terms of country financial risk and its determinants in terms of the average period of 2002-2022 shows that many developing countries exporting industrial goods have low country financial risk during the period under study; hence, very little industrial exports of developing countries in an uncertain environment are exported to the global market in this respect.
The results of estimating the industrial export attraction model of developing countries in the form of six attraction models, taking into account the country financial risk index (FRR) and 5 determinants including the current account risk index (CA), debt service risk (FDS), external debt risk (FD), exchange rate stability risk (ERS), and international liquidity risk (NIL), show that the coefficient of the variable of the country financial risk index of developing countries in the industrial export attraction model is positive as expected and statistically significant at the 1 percent error level. The coefficients of the stated variables that show the elasticity of industrial exports of developing countries to the country financial risk of this group of countries are 2.588 units. Specifically, with a one percent increase in the country financial risk index of developing countries, there is a 2.588 percent increase in the growth of industrial exports of developing countries. The sign of the coefficient of the variable of the country financial risk index of export destinations in the industrial export attraction model is negative and statistically significant at the 1 percent error level. The coefficients of the variables that indicate the elasticity of developing countries' industrial exports to the country financial risk of developing countries' export destinations are -0.968. Specifically, with a one percent increase in the country financial risk index of export destinations (risk reduction), the growth of developing countries' industrial export demand decreases by 0.968. This empirical finding leads to the conclusion that reducing the country risk of export destinations is not only an important and important determinant of stimulating the demand for developing countries' industrial exports, but also leads to a decrease in the demand for developing countries' industrial exports. The results also show a positive and statistically significant effect of the five components of developing countries' country financial risk and export destinations on the industrial exports of these countries. Among the five components determining the country financial risk of developing countries, current account risk (ca), debt service (fds), exchange rate stability (ers) and international liquidity risk (nil) have a positive and significant effect on industrial exports of developing countries at the 1 percent error level. This is while the external debt risk component (fd) of developing countries does not have a significant relationship with industrial exports of this group of countries at a statistically acceptable level. Among the components affecting industrial exports, three components of current account risk (3.253), debt service risk (1.167) and exchange rate stability risk (1.111) have elasticity above one and international liquidity (0.417) has elasticity less than one in the industrial export model of developing countries. The results related to the impact of the country financial risk components of export destinations of developing countries show that the coefficients of all 5 components determining the country financial risk of export destinations are statistically significant at the 1 percent error level. Meanwhile, the coefficients of the current account risk components (-0.596), service debt (-0.642), external debt (-0.190), and international liquidity (-0.129) are negative, which indicates that with an increase in the coefficients of these components (risk reduction) of export destinations, the demand for industrial exports of developing countries decreases. In contrast, the exchange rate instability risk component (0.608) has a positive coefficient, and thus, with an increase in the exchange rate instability risk of export destinations (risk reduction) by one percent, the demand for industrial exports of developing countries increases by 0.608 percent.
Conclusion
This study focuses on examining the impact of country financial risk on industrial exports of developing countries and the role of each of its determinants. Based on the literature, trends, determinants, and the impact of each of the classical factors affecting bilateral trade have been examined along with the determinants of country risk.
The results of the descriptive analysis of trends show that many developing countries exporting industrial goods in the period under study have low country financial risk, which indicates that industrial exports of developing countries have been made to the world market in an environment of very little uncertainty in this regard. A large share of the low risk mentioned in developing countries is due to the low country current account risk, service debt risk, and exchange rate stability risk. Also, a high share of developing countries' exports is exported to countries that have very little uncertainty in the area of ​​country financial risk.
It is noteworthy that from 2011 to 2022, the level of country financial risk in developing countries increased, contrary to the trend in industrial exports. This indicates an increase in country financial risk and uncertainty in the financial sector in this group of countries since 2011. The increase in this uncertainty in recent years is more evident in the areas of external debt, international liquidity, and exchange rate stability. This is while the risk of service debt and account risk has decreased. Therefore, the results of examining the trends of country financial risk in developing countries indicate that in recent years, the financial risks of this group of countries for the development of industrial exports to the world in the field of industrial goods have been growing. Another point of the study is that, at the same time as country financial risks have increased, the growth of industrial exports has slowed down. Econometric analysis confirms the role of country financial risk in the growth of industrial exports of developing countries. Similarly, the country financial risk conditions of developing countries and export destinations are introduced as one of the effective factors in the growth of industrial exports of developing countries. It is noteworthy that the country financial risk conditions of developing countries have the greatest impact on industrial exports compared to other classical factors of the Gravity Model such as economic size, distance and common border and have a demand elasticity of one. Among the five components determining the country financial risk of developing countries, reducing current account risk, service debt, exchange rate stability and international liquidity risk have a positive effect on the growth of industrial exports of developing countries. This is while increasing the country financial risk, current account, service debt and international liquidity risk of export destinations reduces the growth of industrial exports of developing countries, which confirms the results of the studies of Kai et al. (2022) on the impact of country financial risk. Of course, increasing the exchange rate stability risk of export destinations reduces the growth of industrial exports of developing countries. This is an important empirical finding in terms of the different roles of developing countries’ country financial risk and export destinations on the growth of developing countries’ bilateral industrial exports. Since financial risk has the fastest impact on the cash flows and income of developing countries’ industrial export firms, it seems that industrial manufacturing firms in these countries manage risk by expanding their export activities within the framework of regional cooperation in order to be less exposed to financial risk.
Policymakers seeking to reduce the consequences of financial risk as a tool for developing countries’ industrial exports should consider strengthening institutional quality to improve country risk management by international and regional organizations facilitating financial flows as a primary strategy for developing regional cooperation among developing countries; therefore, increasing institutional capabilities to manage the risk of developing countries’ export firms is essential as a key issue in regional cooperation.

Keywords

• industrial exports
• financial risk
• gravity model
• developing countries