Cash-in-advance, export decision and financial constraints: Evidence from cross-country firm-level data Ngoc Thang Doan, PhD * , Thi Kim Chi Vu, Thi Cam Thuy Nguyen, Thi Hong Hai Nguyen, Kieu Trang Nguyen Banking Academy of Vietnam, No.12 Chua Boc, Dong Da, Hanoi, Viet Nam ARTICLE INFO JEL classification: F3 F10 G31 G32 Keywords: Cash in advance Export decision Financial constraint Trade credit SMEs ABSTRACT This paper investigates the relationship between Cash In Advance (CIA) and firms’ export participation, particularly in the presence of financial constraints. Using the firm-level data covering 56 countries for the period from 2006 to 2010, we detect the positive correlation of the employment of CIA and the export participation of small and medium-sized firms only. This correlation becomes more prominent for severely credit-constrained firms. One possible expla- nation is that CIA raises the export possibility of small and medium-sized firms by ameliorating credit constraints while it plays no role in large-sized ones. 1. Introduction Cash In Advance (CIA) is coined as one of the payment methods that affect a company’s propensity to export. According to an IMF (2009) study, CIA accounts for 19–22% of international transactions. It is a payment method that provides an alternative business funding source that export companies can use when there is a lack of collateral or credit ratings. Payment is expected by the exporter, in full, prior to the goods being shipped. It can therefore be said that advance payment is the most secure method of trading for exporters and, consequently the least attractive for importers. This calls for a thorough study on the role of CIA in global trade. There is a recent but growing body of academic literature on the choice of financing terms in international trade. Nevertheless, the effect of using CIA on exporting behavior has been the object of little scrutiny. Daripa and Nilsen (2011) demonstrate that financially stronger firms may optimally decide to advance cash to their upstream suppliers when the latter would otherwise delay production. A handful of papers investigate the role of advance payments in the optimal payment system for international trade (Ahn, 2011; Schmidt-Eisenlohr, 2013). Antras and Foley (2015) explain that advance payment is preferred to trade credit when contractual enforcement is weak in the importer’s country. Hence, it can be seen that there is little research into the impact of prepayment on the export activities of credit-constrained companies. This paper attempts to close this gap by examining how this method of payment affects the company’s ability to export, as well as the export decisions of credit-constrained companies. We apply a probit method with the firm-level cross-country data from 2006 to 2010 in order to examine the effect of CIA on the * Corresponding author. E-mail addresses: ngocthangdoan@hvnh.edu.vn (N.T. Doan), chivtk@hvnh.edu.vn (T.K.C. Vu), thuyntc@hvnh.edu.vn (T.C.T. Nguyen), hainth@ hvnh.edu.vn (T.H.H. Nguyen), trangkieu275@gmail.com (K.T. Nguyen). Contents lists available at ScienceDirect International Review of Economics and Finance journal homepage: www.elsevier.com/locate/iref https://doi.org/10.1016/j.iref.2020.04.013 Received 23 July 2019; Received in revised form 10 February 2020; Accepted 19 April 2020 Available online 4 May 2020 1059-0560/© 2020 Published by Elsevier Inc. International Review of Economics and Finance 69 (2020) 75–92