International Review of Economics and Finance 82 (2022) 120–134

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International Review of Economics and Finance

journal homepage: www.elsevier.com/locate/iref

Exchange rate volatility and import of intermediate inputs:

Evidence from Chinese firms☆
Yifan Li a, b, Zhuang Miao c, *, Maxwell Tuuli d
a
School of Economics and Management, Zhejiang Ocean University, Zhoushan city, China
b
UNESCO Institute for Statistics, Montreal, Canada
c
School of International Trade and Economics, Central University of Finance and Economics, Beijing, China
d
International Monetary Fund, Washington, United States

A R T I C L E I N F O A B S T R A C T

Keywords: An extensive amount of literature suggests that exchange rate volatility has a negative impact on
Exchange rate volatility international trade. However, very few research consider the distinct effect of exchange rate
Financial vulnerability volatility on intermediate input trade. This paper studies the effects of exchange rate volatility on
Import of Intermediate Inputs
the import of intermediate inputs and evaluates how the effects are shaped by a series of firm
characteristics. Using a comprehensive dataset of Chinese importing firms from 2000 to 2006, our
empirical analysis indicates that exchange rate volatility negatively impacts the import of in­
termediate inputs both on the extensive and intensive margin. Further, we find that this negative
effect is more pronounced for firms with higher financial vulnerability. We use a simple schematic
diagram to explain the transmission mechanism and emphasize the role of financial vulnerability
in amplifying the effects of exchange rate volatility.

1. Introduction

Over the past few decades, firms involved in international trade have faced significant challenges from their trading partners. These
challenges revolve around uncertainties relating to political instability, credit risks and market demand shocks. One of the most
common and contentious issues is the uncertainties from exchange rate fluctuations and how that impacts trade. The global Forex
market is by far the largest international financial market with its daily trading volume of over 5 trillion USD. The exchange rate
fluctuation therefore brings huge uncertainties and costs for firms both in times when exchange rates float mildly and in times when
currencies move in a more dramatic fashion such as during the Asian Crisis of 1997–1998 and during the Financial Crisis in 2008. The
effect of exchange rate risk on firms’ exporting performance has been widely studied in recent years. However, there is lack of
empirical evidence taking account of the role that exchange rate volatility play in the import of intermediate inputs thus prompting us
to examine the issue.
Understanding how firms’ import choices change with respect to exchange rate volatility is important for at least two reasons: First,

☆
We are thankful to David Greenaway, Changyuan Luo, and all participants of 11th GEP Conference at University of Nottingham Ningbo China
(November 2019). The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its man­
agement. Errors remain our own. Zhuang Miao gratefully acknowledge funding Supported by Program for Innovation Research in Central University
of Finance and Economics.
* Corresponding author.
E-mail addresses: liyifan@zjou.edu.cn (Y. Li), 0020190001@cufe.edu.cn (Z. Miao), MTuuli@imf.org (M. Tuuli).

https://doi.org/10.1016/j.iref.2022.06.012
Received 20 July 2020; Received in revised form 24 December 2021; Accepted 13 June 2022
Available online 16 June 2022
1059-0560/© 2022 Elsevier Inc. All rights reserved.
Y. Li et al. International Review of Economics and Finance 82 (2022) 120–134

a vast majority of literature has shown that the import and use of intermediate inputs affect a firm’s performance in many dimensions
including productivity, export performance, and the usage ratio of high-skill labour (Amiti & Khandelwal, 2013; Amiti & Konings,
2007; Dai & Xu, 2017; Fan et al., 2015; Feng et al., 2016; Goldberg et al., 2010; Gopinath and Neiman, 2014; Halpern et al., 2015;
Kandilov & Leblebicioğlu, 2011; Kasahara et al., 2016; Kasahara & Rodrigue, 2008; Li & Miao, 2017, 2018; López & Nguyen, 2015a).
The study of how firms confront and contain the exchange rate risks opens the doors to help us understand the linkage from the use of
foreign inputs to firm performance measures.
Second, few existing empirical studies have found a negative relationship between exchange rate volatility and the firms’ import
performance, but the relevant study in this area is still incomplete in many aspects. For example, using Chilean firm-level data, López
and Nguyen (2015a) finds that exchange rate volatility reduces firms’ import of intermediate inputs in terms of the intensive margin
(import value), but not the extensive margin (import status). However, to the best of our knowledge, there are at least two gaps that
remain relatively unexplored in the existing literature. Firstly, the existing literature fails to study the interaction between firms’
financial vulnerability and exchange rate volatility and their impact on importing intermediate inputs, which is widely considered a
key variable for exploring the transmission mechanism in the importing decision of firms. Secondly, there is a dearth of evidence in a
Chinese setting. Considering China has become the largest trading country and her trading patterns are quite different from the
previous country case that has been studied, i.e. Chile in López and Nguyen (2015a), it is necessary to consider the evidence on Chinese
firms. For example, China’s main trading industry is manufacturing, while Chile’s main trading industry is mining. Therefore, our
study aims to answer two research questions that have remained unclear in the literature: How do Chinese firms adjust their import of
intermediate inputs in response to varying exchange rate volatility? What is the transmission mechanism through which exchange rate
volatility can affect the import and use of intermediate inputs?
Our empirical study reveals several remarkable empirical findings: (i) firms reduce their import value and scope from trading
partners in response to a higher level of exchange rate volatility; (ii) this negative effect is more pronounced in firms with higher
financial vulnerability; and (iii) private and foreign-owned firms reduce their importing probability (extensive margin) in response to
higher exchange rate volatility. These results indicate the deterrent effect of exchange rate volatility on firms’ imports. Exchange rate
fluctuation raises price risks for importing firms, which is equivalent to an increase in sunk cost for firms (Héricourt & Poncet, 2013).
Fig. 1 illustrates the time-line of the import transaction process. In the first stage, the firm decides where to source and borrow
production loan and foreign currency from the bank. In the second stage, the import transaction and payment to the input suppliers as
well as the bank will be completed. According to the illustration, the exchange rate risk emerges when there is a long timing gap
between the two stages due to preparation and shipment of the goods, which usually takes a few weeks to several months to complete.
Because the import contract and borrowings are made in the first stage while the spot exchange rate is realized in the second stage,
the firm should make a rational expectation of the exchange rate that would be realized in the future and negotiate with the suppliers
on how to share the benefits or losses from the exchange rate fluctuation. Usually, a typical risk-averse firm will buy insurance against
the exchange rate risks, which is equivalent to an increase in the firm’s production sunk costs (Héricourt & Poncet, 2013).
Our study contributes to the existing literature on two grounds: (i) to the best of our knowledge, we are the first to examine the
relationship between exchange rate volatility and the import of intermediate inputs using Chinese import data with emphasis on the
role of financial constraints; and (ii) we provide evidence on the relationship between exchange rate volatility and import scope.
The rest of the paper is organized as follows: Section 2 reviews some key literature on the subject; section 3 describes the data used
in our study; section 4 presents the empirical specification and results; section 5 concludes our main findings and contributions.

Fig. 1. Timing line of import transaction

Notes. Fig. 1 illustrates the time-line of the import transaction process. In the first stage, the firm decides where to source and borrow production
loan and foreign currency from the bank. In the second stage, the import transaction and payment to the exporting firm as well as the bank will be
completed. According to the illustration, the exchange rate risk emerges when there is a long timing gap between the two stages due to preparation
and shipment of the goods, which usually takes a few weeks to several months. Because the import contract and borrowings are made in the first
stage while the spot exchange rate is realized in the second stage, the firm should make a rational expectation of the exchange rate that would be
realized in the future and negotiate with the exporting firm on how to share the benefits or losses from the exchange rate fluctuation. Usually, a
typical risk-averse firm will buy insurance against the exchange rate risks, which is equivalent to a rise of the firm’s production costs.

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2. Literature review

In this section, we review some key literature regarding our study. We find that a bulk of the literature in this area are centered on
how exchange rate fluctuations and risks affect international trade. However, most of them focus on firms’ exporting performance with
very few exploring the effect on firms’ importing performance. Moreover, among the literature on firms’ importing performance, the
transmission mechanism studied is usually incomplete.
We find that very few studies focus on the impact of exchange rate volatility on imports, including Arize (1998) and López and
Nguyen (2015a). The work by López and Nguyen (2015a) is closely related to our study. Using Chilean firm-level import data, they
explored the impact of exchange rate volatility on imports and find a significantly negative effect on the intensive margin of import
(import value by each firm), but insignificant effect on the extensive margin (import status of each firm). Basically, our empirical
analysis complements López and Nguyen (2015a) in two aspects: firstly, we find a negative effect of exchange rate volatility on firms’
extensive margin of import when firms face high financial constraint while López and Nguyen (2015a) find a mute effect on the
extensive margin; secondly, we provide evidence on import diversification, which is measured by the number of import varieties
(import scope), while López and Nguyen (2015a) did not provide such analysis due to data limitation. Compared to López and Nguyen
(2015a), our study has a more extensive dataset. In contrast to López and Nguyen (2015a), our dataset records firm-product-country
level transaction data. This data structure allows us to examine more features of the relationship between exchange rate volatility and
imports. For example, we can extend our analysis to the firm’s importing scope (the number of varieties) and examine the role that
financial constraints play.
In contrast to the few studies on firms’ imports, there are many studies exploring the effect of exchange rate volatility on export.
However, the findings and conclusions from the existing research are inconclusive. Some studies find a negative relationship, e.g.
Héricourt and Poncet (2013), Berthou and Fontagné (2013), and Li and Miao (2017); while some find that exchange rate fluctuations
have a positive or insignificant effect e.g., Bahmani-Oskooee and Hegerty (2007), Cushman (1983), Daly (1998), Gagnon (1993),
Greenaway et al. (2010), Huchet and Korinek (2011), Qiu et al. (2019), Solakoglu et al. (2008), Sercu and Vanhulle (1992), Tenreyro
(2007), Wang and Barrett (2002), and Zhang et al. (2006); and the rest find a non-linear effect of exchange rate fluctuation, i.e., Baum
et al. (2004), Berman and Berthou (2009), and Chen and Juvenal (2016), or heterogeneous results with different samples, i.e., Baum
et al. (2004), Sauer and Bohara (2001) and Senadza and Diaba (2017). Sauer and Bohara (2001) find a negative effect for developing
countries (expect Asian countries), but an insignificant effect for industrialized countries. Using African trade data, Senadza and Diaba
(2017) find a negative effect in the short run, but a positive effect in the long run. To explore the transmission mechanism, Héricourt
and Poncet (2013) study the interaction of financial constraint and find that the effect of exchange rate volatility on exports is more
pronounced on firms with higher financial vulnerability. Motivated by Héricourt and Poncet (2013), we assume that the effect of the
exchange rate volatility on imports also depends on firms’ financial conditions. Firms with higher financial vulnerability will be more
sensitive to market risks. To test this hypothesis, we estimate the interaction of firms’ financial vulnerability and exchange rate
volatility on imports. The empirical results from the estimation are in support of our hypothesis: we find a significantly negative
coefficient on the interaction between exchange rate volatility and firm-level financial vulnerability.

3. Data and measurement

The empirical analysis requires three key ingredients: measures of countries’ economic variables (including the exchange rate),
firm-level measures of financial vulnerability, and data on trade activity across countries and sectors. In this section, we introduce the
variables in our empirical analysis, i.e. the data sources and the methodology used to construct them.
Our dependent variables include (a) firms’ import value and scope (which they refer to as the intensive margin), and (b) firm’s
decision to begin import from an origin country (what they call the ‘extensive margin’). The import value is computed as the total
import value in each firm-origin-year pair. Import scope is computed as the total number of varieties that counted based on either HS6
code or HS8 code by each firm-origin-year pair. The dummy for firm’s decision to begin import from an origin country is defined as the
first year that the firm start to import from an origin country (also see Héricourt and Poncet (2013)). Our key dependent variable is real
exchange rate volatility (RER volatility), which measures the trade risk from the fluctuation of RER.

3.1. Real exchange rate (RER) and RER volatility

In our empirical estimations, we use the volatility of a foreign currency’s nominal exchange rate against the Chinese yuan, i.e., the
unit(s) of foreign currency per Chinese yuan, as our key explanatory variable. Choice of the exchange rate type, i.e., nominal exchange
rate (NER) or real exchange rate (RER), has been discussed and disputed by several studies. For example, Héricourt and Poncet (2013)
and López and Nguyen (2015a) use the RER, which takes the change of each country’s consumer price index (CPI) into account, as their
key explanatory variable. As argued by Héricourt and Poncet (2013), the RER could accurately reflect the change of goods’ relative
prices between the exporting and importing countries. However, the NER cannot fully reflect the relative price. Firms and consumers
decide where to buy intermediate inputs and products, either domestically or overseas, based on this relative price. For robustness, we
use both the RER and NER in our estimations. We estimate our main regressions with the RER while estimating with the NER as a
robustness check. Then, following the existing literature, e.g. López and Nguyen (2015a), we compute the yearly exchange rate
volatility as the standard deviation of the log-difference of monthly NER, i.e.
( / )
RERjt,m = NERjt,m × CPIjt,m CPIct,m (1)

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where NERjm is the nominal exchange rate of Chinese yuan against country j’s currency in the month m of year t, CPIjt,m is the con­
sumer’s price index for country j in the month m of year t, and CPIct,m is the consumer’s price index for China in the month m of year t.
This index measures the movement of the input price from country j due to the real exchange rate fluctuation. Then, following the
existing literature, e.g. López and Nguyen (2015b), we compute the yearly exchange rate volatility as standard deviation of the
log-difference of monthly RER, i.e.
( )
RER voljt = Std.Dev. lnRERjt,m − lnRERjt,m− 1 (2)

where RERjt,m is the RER of country j in the month m of year t.

It is worth noting that this index of exchange rate volatility as calculated above has two appealing features. First, the log-difference
process re-scales the values of RER concerning different currencies and eliminates the country-level fixed effects. Second, the index
value is invariant to different measurement methods of the exchange rate, i.e., either how much Chinese yuan per foreign currency or
how much foreign currency per Chinese yuan. We will reach an identical exchange rate index by using either of these two measures for
the exchange rate. Thus, the method suggested by López and Nguyen (2015b) eliminates more of the measurement error issues
inherent in the traditional method in that, the exchange rate volatility is simply computed as the yearly standard deviation of the
monthly exchange rate. For robustness, we also replicate our main estimations using the index constructed with the traditional method
and reach consistent results with our main estimations.

3.2. Financial vulnerability

Our empirical analysis also explores the interaction of firms’ financial vulnerability in influencing the relationship between ex­
change rate volatility and the import of intermediate inputs. We closely follow the measures of sectoral financial vulnerability in the
literature. And we obtain the time-invariant measures directly from Manova (2008), Manova (2012), Manova and Yu (2016), and
Braun (2005), which compute the sectoral financial vulnerability by external financial dependence and asset tangibility using
COMPUSTAT’s public firm data spanning the period 1986 to 1995. The financial vulnerability measures for the 27 sectors in the
sample are defined at the 3-digit category in the ISIC industry classification system. We then convert it to HS classifications and
compute firm-level financial vulnerability as the average of each industry’s financial vulnerability that a firm gets involved in,
weighted by the firm’s export share in the industry over our observation period (Héricourt & Poncet, 2013).1
∑ Exportsis
FinVulni = ∑ × FinVulnS (3)
S S Exportsis

where Exportsis is the total export value of firm i in sector s during our observation period; and FinVulnS is the financial vulnerability
index for sector s. This index measures the proportion of capital expenditures that are not financed out of the cash flows from firms. We
use the measure of innate dependence of external financial resources for our baseline measure of the financial vulnerability of a sector,
FinVulnS , which is constructed as the share of capital expenditures not financed out of cash flows from operations. If a firm has higher
external financial dependency, i.e., higher value of FinVulnS , it will have higher level of financial vulnerability. Besides the external
financial dependency, we also proxy firms’ ability to raise the external finance with equation (3). We compute this index as the
endowment of intangible assets by each firm. A higher value of this index indicates a weaker ability of the firm to raise external finance.
This measure is supposed to capture the level of difficulty to collateralize assets for external finance, therefore a higher level of
financial vulnerability (Manova & Yu, 2016). Trade Data.
Our last and main data source is the customs transactional firm level database maintained by China’s Customs. This database
records firm-country-product level of import value and import variety each year.2 Data are at very disaggregated product categories
(eight-digit HS classification). As the trade patterns of final product importing firms are quite different from those of input importing
firms, we restrict our sample to intermediate inputs importers. We focus on Chinese intermediate input importing firms between 2000
and 2006, the period for which we have access to the data. We identify the imported intermediate inputs according to the Broad
Economic Categories (BEC Rev. 4) that designed in 2002 by United Nations. The import value is dominated in current value US dollar
(USD).
Table 1 presents descriptive statistics of firm-country level trade data and firm-level characteristics, including firm-country level
import value, scope, status, and country level exchange rate volatility, exchange rate, and GDP. The import scope is computed as the
total number of varieties that are classified by either HS8 code or HS6 code. The exchange rate data are collected from the International
Monetary Fund (IMF), while the data for CPI, GDP and GDP per capita are collected from the Penn World Table (PWT 9.0). As our main
dependent variables of interest are import value and import scope, observations reported here are only firm-country pairs that have

1
The data for each firm’s domestic sales in each industry are unavailable. Thus, we estimate the individual firm’s financial vulnerability only
using the export data. This is a necessary simplification, due to data limitation, which does not significantly impact the calculation of the
vulnerability measure. The rationale for using export data to calculate firm level financial vulnerability in the absence of domestic sales is as follows:
we know that more productive firms self select into the export market (Melitz, 2003) and are less financially constraint (Ferrando & Ruggieri, 2018).
Thus, by using export sales we are estimating the lower bound of financially constrained firms.
2
Although the data are available at monthly frequency, we use annual data because of concerns of seasonality and lumpiness in shipping: most
firms do not import from the same market from one month to the other.

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Table 1
Summary statistics: Key variables.
Mean Std. Dev. Min. Max. Observ.

Import value (in USD) 1,466,918 3.95E+07 1 3.76E+10 1,981,843

Import scope (HS6) 5.164 13.693 1 1548 1,981,843
Import scope (HS8) 5.311 14.651 1 1755 1,981,843
Import status 0.5 0.5 0 1 1,491,456
External dependence 0.792 0.117 0.329 1 243,515
Intangibility 0.297 0.28 − 0.451 1.14 243,515
RER Volatility 0.023 0.022 0 0.412 1388
RER 1.684 4.059 − 3.34 23.532 1407
GDP 351,578.10 1,233,373 72.368 1.53E+07 1112
GDP Per Capita 14,603.11 16,669.41 468.345 118,131.80 1112
Price Index 0.481 0.246 0.086 1.374 1112

Notes. This table reports mean, standard deviation, minimum, maxi, mum values and number of observations of firm-country level and firm-level
variables: import value, import scopes (HS6 and HS8), import status. The summary statistics for two measures of financial vulnerability are at the
firm level: External Dependence and Intangibility. This table also reports number of observations, mean, and standard deviation on country-level
variables: GDP, GDP per capita, Price Index. The RER (NER) change and RER (NER) Volatility is measured based on the indirect quoting of
foreign currencies against RMB. The RER (NER) volatility is computed as annual standard deviation of monthly log differences in the real (nominal)
exchange rate.

positive trade in at least one year between 2000 and 2006. Following China’s accession to the WTO in 2001, both total import value
and import scope spike sharply. As the trade surges from China, both the number of importers and trading partners also increased
rapidly in lockstep.

4. Empirical analysis

This section provides evidence on the relationship between the exchange rate volatility and the firms’ importing performance. We
also provide evidence on the effect of the interaction of firms’ financial vulnerability and exchange rate volatility in determining firm
intermediate input import performance.
Particularly, we study how RER volatility impact both the intensive margin of import and the extensive margin of import. In
particular, the intensive margin being studied is the “within-firm intensive margin” which refers to a multi-product firm’s total value of
imports it imports from an origin market. It can also refer to a multi-product firm’s total number of products it imports from an origin
market. This is standard in the trade literature. The extensive margin being studied is a firm’s decision to begin import from an origin
country. Specifically, the explained variable is defined as the decision for a firm to begin importing from market j in year t. It is
constructed as a change of import status at the firm-country level; it takes the value 1 when a firm imports from country j in year t but
did not in year t-1. The same definition on extensive margin can be found in Héricourt and Poncet (2013).

4.1. Specification

We use four importing performance measures to capture both the intensive and extensive margin of imports at the firm-country
level: import value, import scope at HS6 level, import scope at HS8 level, and the change of import status. The import scope is
computed as the (log) number of the varieties (HS6 or HS8 code) imported at the firm-country-year level. For the import status, we
follow the method by Héricourt and Poncet (2013), and construct the import status dummy which takes the value 1 at time t when the
firm imports from country c at time t but did not at time t − 1 and zero when the imports take place at time t + 1 but did not at time t.3
Our econometric specification is as follows.
Importijt = α × Exchange voljt + Zjt × β + λij + δt + εijt (4)

where i, j, and t denote each individual firm, origin country, and the observation year, respectively. All variables are in logs except the
exchange rate volatility. Importijt indicates the firms’ import performances, which include the import value,4 scope and status of firm i
from country j in year t. Of which, the import scope is computed as the (log) number of the varieties (HS6 or HS8 code) by the firm-
country-year level. The key explanatory variable is the real exchange rate volatility of country j in the year t, i.e. Exchange− voljt. Zjt
controls for the macro characteristics of country j, which includes the RER, GDP and CPI of the origin country j in the year t. λit controls
for the time-invariant firm-country level fixed effects. δt controls for the time fixed effects.5
Another important dimension of our study is to explore the mechanism through which exchange rate volatility affects firm-level

3
For example, if the import values for the years from 2000 to 2006 are 0, 23, 45, 0, 0, 77, 0, then the dummy values will be 0, 1,.,.,0,1,.
respectively.
4
Import value is denominated in U.S. dollars. We also check the robustness of our estimation with the import value in terms of Chinese yuan. The
results are consistent with the main estimations.
5
In our main regressions, the error terms are clustered at firm level. Note that our results are mostly unchanged when clustered at country level.

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imports. To answer this question, we include in our regression the interaction between firms’ financial vulnerability (measured by the
external financial dependency) and the exchange rate volatility. The idea is that a significant negative coefficient on the interaction
would mean that firms with a higher financial vulnerability will be affected more by the exchange rate volatility in terms of import
performance. With this result, we conclude that a rise in the exchange rate volatility is equivalent to increasing a firm’s import costs
due to the increased level of uncertainty associated with a rise in the exchange rate volatility. The firms with higher level of financial
constraints are more sensitive to increases in such costs. The estimation model is specified as equation (5) below.
Importijt = α × Exchange voljt + β × FinVulni × Exchange voljt + Zjt × γ + λij + δt + εijt (5)

4.2. Results

In this section, we present the results from estimating our econometric equations. We are interested in the impact of the exchange
rate volatility and the role of financial vulnerability in determining the import performance of firms.

4.2.1. Baseline results

In the baseline estimation, we look at several dimensions of importers’ behavior, i.e. import value, scope, and import status. Our
main variable of interest is the sign and size of the coefficient on our measure of exchange rate volatility which measures the effect of
exchange rate volatility on firm-origin level import choices. We use the annual standard deviation of the log difference of monthly RER
in the baseline estimation. Table 2 shows the baseline specification results (3) for the impact on the intensive margin, which controls
for the firm-origin and year fixed effects.
We first look at the direct effect of exchange rate volatility across origin countries on import value in columns (1) & (2) of Table 2.
After controlling for all the national variables, we observe that firms import less from the origin country when the exchange rate
volatility is higher. In terms of the magnitude, an increase of the standard deviation of the RER volatility by 0.1 reduces the import
value by about 5.49%, according to column (2).
Similar effects are found when we estimate the effect of RER volatility on the import scope, i.e. the number of variety of products
imported by a single firm from a specific origin, where the variety is distinguished by the HS6 classification code. On the number of
imported varieties in columns (3) & (4): higher levels of RER volatility are associated with a lower number of imported varieties from
the origins. An increase of the origin’s RER volatility by 0.1 reduces a firm’s import variety by about 11.17%, according to column (4).
We find both the sign and magnitudes of the results to be consistent when estimating import scope at the HS8 product classification in
columns (5) & (6), where a 0.1-unit increment of volatility is associated with an 11.64% decrease in import scope.
To see how RER volatility affects import decisions on the extensive margin, we regress exchange rate volatility on import status.
Table 4 reports the estimation results for the effect of RER volatility on this extensive margin of import. Based on the estimations
controlling for all national variables, we find a similar significant effect of exchange rate volatility on firms’ importing status as
suggested by column (1) and (2) in Table 4. The results are consistent with the main estimations when we alternatively use the nominal
exchange rate (NER) of the origin country’s currency against Chinese yuan or the real effective exchange rate, wherein the origin
country’s currency is computed against a basket of currencies.

4.2.2. Interaction of the financial vulnerability

To understand the mechanism, we examine the combined effects of RER volatility and financial vulnerability on both the intensive
and extensive import margins. As discussed in the previous section, we suppose financial vulnerability plays important role in the
effects of the RER volatility on imports.
On the one hand, financial stress is an essential consideration for an importer. A volatile cash outflow due to RER volatility is
unpredictable and brings an importer high levels of uncertainty. Therefore, firms would generally be wary of importing from countries
with unpredictable currencies. We thus expect a negative relationship between increased volatility of exchange rate and firm import
performance.
On the other hand, a firm’s import decision is likely to be constrained by the limit of funding sources it has access to. A firm that is
financially more vulnerable would be less likely to import from origins whose currency is more volatile, which brings unstable input
cost aggravating its financial stress. On the contrary, a higher RER volatility level will require the importer to leverage more on
financial instruments to hedge the risk and thus worsen the importer’s financial conditions.
Therefore, a firm that depends more on external financing would be more sensitive to adjusting its import margins in response to
RER volatility levels across the origins. Our study focuses on investigating the presence of these channels. Following the methodology
in Manova (2012), we construct the financial vulnerability index for each firm to test if firms with higher financial vulnerability are
particularly susceptible to the negative effects of increased RER volatility. We use two indicators for financial vulnerability: the first
one is firm-level external financial dependence. If the firm relies more on external financing, it will face higher financial risks. Thus, a
higher value of this index indicates a higher financial vulnerability. The second one is the firm-level intangible capital ratio. A firm
with a higher level of intangible capital share in its total capital will face higher financial default risk. Thus, the firm will require higher
financing collateral and also likely face a higher interest rate from the bank. Thus, a higher value of this ratio indicates a higher
financial vulnerability level.
To see if importers with higher level of financial vulnerability are particularly susceptible to the negative effects of RER volatility,
we interact our measure of origin country-level RER volatility with our firm-level vulnerability measure in the regression, i.e. we
estimate equation (4). We present the relevant estimation results in Tables 3 and 4. The results indicate that the magnitude of the

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Table 2
Intensive margin: Import value and exchange rate volatility.
Dependent Variable Import Value Import Scope (HS8) Import Scope (HS6)

(1) (2) (3) (4) (5) (6)

a b a a a
RER Volatility − 0.756 − 0.594 − 1.323 − 1.177 − 1.308 − 1.164a
(0.269) (0.269) (0.088) (0.088) (0.089) (0.089)
Country-level Controls NO YES NO YES NO YES
Fixed Effects Firm-country and year
Observations 1,393,551 1,392,935 1,393,551 1,392,935 1,393,551 1,392,935

Notes. (b p-value<0.05; a p-value<0.01). Robust standard errors in parenthesis. Columns (1)–(2) show the results on the change of firm-destination
import value and Columns (3)–(6) show the results on the change of firm-destination import scope at HS8 and HS6 levels. The real exchange rate
(RER) volatility is computed as the log standard deviation of the annual exchange rate of the origin country’s currency against the Chinese yuan. The
country-level controls include the exchange rate, GDP, GDP per capita and price index (CPI) in the origin country. All variables are in logs except the
exchange rate volatility. All the regressions include firm-destination and year fixed effects. The results are consistent with the results above if we
control for the firm-year fixed effects, or use the nominal exchange rate against Chinese yuan. Standard errors clustered at the firm level are in
parentheses. The results are also consistent using the real effective exchange rate (REER), wherein the trade partner’s exchange rate is computed
against a basket of currencies.

Table 3
Intensive margin: The role of financial vulnerability.
Dependent Variable Log Import Value Import Scope (HS8) Import Scope (HS6)

(1) (2) (3) (4) (5) (6)

RER Volatility 0.253 6.394a − 0.671a 1.254 − 0.636a 1.236

(0.421) (1.951) (0.141) (0.673) (0.142) (0.679)
× External Dependence − 3.086a − 1.725a − 1.800a
(1.028) (0.359) (0.363)
× Intangibility − 8.892a − 3.080a − 3.044a
(2.449) (0.841) (0.849)
Country-level Controls NO YES NO YES NO YES
Fixed Effects Firm-country and Year
Observations 1,274,454 1,274,454 1,274,454 1,274,454 1,274,454 1,274,454

Notes. (b p-value<0.05; a p-value<0.01). Robust standard errors in parenthesis. Columns (1)–(2) show the results on the firm-destination import
value and Columns (3)–(4) show the results on the firm-destination import scope (HS6). Columns (5)–(6) show the results on the import scope (HS8).
The exchange rate volatility is computed as the log standard deviation of the annual exchange rate of the destination country’s currency against the
Chinese yuan. The external capital dependence and intangibility are defined as described in the data section. The country-level control variables
include the real exchange rate (RER), GDP, GDP per capita and price index (CPI) in the origin country. All variables are in logs except the exchange
rate volatility. All the regressions include firm-country and year fixed effects. Standard errors clustered at the firm level are in parentheses.

negative effect of exchange rate volatility indeed depends on the extent of the financial constraints. We consistently observe negative
coefficients in the interaction term of RER volatility and financial vulnerability on imports at the intensive margins (i.e. firm-country
level import value and scope). In particular, Table 3 presents the results for the effects on firms’ intensive importing margin. The results
show significantly negative coefficients of the interaction term with the financial vulnerability indexes, suggesting a more pronounced

Table 4
Extensive margin: Import status and exchange rate volatility.
Dependent Variable Dummy for importing status in Firm-origin Level

(1) (2) (3) (4)

a a
RER Volatility − 0.427 − 0.300 − 0.002 − 1.110
(0.091) (0.092) (0.145) (0.720)
× External Dependence − 0.840b
(0.370)
× Intangibility 1.078
(0.894)
Country-level Controls NO YES YES YES
Fixed Effects Firm-country and Year
Observations 1,314,463 1,313,150 1,104,123 1,104,123

Notes. (b p-value<0.05; a p-value<0.01) Standard errors in parenthesis. Columns (1)–(4) show the results on the dummy for importing status at the
firm-origin level, where the dummy is defined in the empirical specification section. The exchange rate volatility is computed as the log standard
deviation of the annual exchange rate of the destination country’s currency against the Chinese yuan. The country-level control variables include the
exchange rate, GDP, GDP per capita and price index (CPI) of the origin country. All variables are in logs except the exchange rate volatility. All the
regressions include firm-destination and year fixed effects. Standard errors clustered at the firm level are in parentheses.

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effect of RER volatility on firms with higher financial vulnerability.

We are also interested in whether the RER volatility will affect a firm’s decision to import from an origin country (extensive
margin). Firm-level financial constraints (see Arndt et al. (2012), Buch et al. (2014), and Wagner (2013)) are found to pose a significant
threat to the level of imports and the decision to start import from a foreign origin for each firm. The baseline results for the effect of
exchange rate volatility on firms’ import decisions are presented in Table 4. We do not find sufficient evidence to support interaction
effect of financial vulnerability on the extensive importing margin. According to Columns (3)–(4) in Table 4, we only found significant
negative coefficient on external dependence ratio, while the interaction term of RER volatility and intangible capital ratio remain
insignificant.

4.2.3. The role of firm ownership

Another area of interest of our research is to explore the heterogeneous effects by different ownership structures. As shown in
Table 5 and Table 6, the exchange rate volatility has significantly negative effects on state and foreign-owned firms’ intensive
importing margin, but mute effect on private firms’ intensive importing margin. For the extensive margin, we only find a significantly
negative effect on private and foreign owned firms. These results suggest that in response to a rise of exchange rate risk, the state-
owned firms are more likely to adjust their intensive margins, while private firms are more likely to adjust their extensive margin.
Foreign firms will adjust both the intensive and extensive margins. These results provide suggestive evidence on how dynamic firms
can be when responding to negative shocks.

5. Robustness checks

To test the robustness of our main results on the relationship between RER volatility and import choices, we perform a battery of
robustness checks from Table 7 to Table 18.

5.1. Sensitivity to the sample choice

Our baseline results are obtained using the full sample of all importers over the period of 2000–2006. One direct concern is that our
main results might be sensitive to a large proportion of firms who import only from one origin, or a large proportion of firms who
import few fixed varieties. We first test the robustness of our main results by restricting our sample to importers who import from more
than one origin over the entire sample period. Next, we estimate our baseline specifications using the subsample of firms importing
more than one variety (defined at HS8) level. These subsample estimation results are reported in Table 7 to Table 10.
Tables 7 and 8 report the estimation results using the subsample that excludes firms with only one sourcing origin. Consistently, we
find significant negative effects of RER volatility on import, and once again, the effects are more pronounced for firms with a high level
of financial vulnerability. Tables 9 and 10 report the results that exclude the samples with only one import variety. Unsurprisingly, the
estimation results are consistent with our main regressions. These robust results suggest that our results in the baseline are not driven
by our choice of importer samples.

5.2. Sensitivity to the exchange rate choice

Considering the rational decision-making of importers who take account of the real purchasing power across currencies, we looked
at the effect of exchange rate volatility on imports using the real exchange rate instead of nominal exchange rate in our previous
estimations. However, a potential concern in our estimation is whether our results will change with the nominal exchange rate.
To test our results’ sensitivity to the choice of exchange rate, we estimate the same specifications with an alternative measure of

Table 5
Intensive margin and firm ownership.
Dependent Variable Import Value Import Scope (HS6) Import Scope (HS8)

SOE Private Foreign SOE Private Foreign SOE Private Foreign

(1) (2) (3) (4) (5) (6) (7) (8) (9)

RER Volatility − 0.184 − 0.397 − 0.773b − 0.617a − 0.004 − 1.578a − 0.582a 0.032 − 1.580a
(0.517) (0.918) (0.334) (0.163) (0.324) (0.111) (0.164) (0.327) (0.112)
Country-level Controls YES YES YES YES YES YES YES YES YES
Fixed Effects Firm-country and Year
Observations 341,601 163,999 878,194 341,601 163,999 878,194 341,601 163,999 878,194

Notes. (b p-value<0.05; a p-value<0.01) Standard errors in parenthesis. Columns (1)–(3) show the results on the firm-country import value. Columns
(4)–(6) show the results on the firm-country import scope (HS6). Columns (7)–(9) show the results on the firm-country import scope (HS8). The
exchange rate volatility is computed as the log standard deviation of the annual exchange rate of the destination country’s currency against the
Chinese yuan. The country-level control variables include the exchange rate, GDP, GDP per capita, and price index (CPI) of the origin country. All
variables are in logs except the exchange rate volatility. All the regressions include firm-destination and year fixed effects. Standard errors clustered at
the firm level are in parentheses.

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Table 6
Extensive margin and firm ownership volatility.
Dependent Variable Import Status

SOE Private Foreign

(1) (2) (3)

RER Volatility − 0.118 − 0.078b − 0.122a

(0.104) (0.037) (0.042)
Country-level Controls YES YES YES
Fixed Effects Firm-country and Year
Observations 323,722 291,110 741,966

Notes. (b p-value<0.05; a p-value<0.01). Standard errors in parenthesis. This table shows the results of firm ownership types on the dummy for
importing status at the firm-origin level. Columns (1)–(3) reports the results on state-owned enterprises (SOE), private firms, and foreign-owned firms
respectively. The country-level independent variables include the exchange rate, GDP, price index (CPI) and GDP per capita of the origin country. All
variables are in logs except the exchange rate volatility. All the regressions include firm-destination and year fixed effects. Standard errors clustered at
the firm level are in parentheses.

Table 7
Intensive margin: Sub-sample with the number of import Origins>1.
Dependent Variable Value Scope(HS6) Scope(HS8) Import Status

(1) (2) (3) (4)

RER Volatility − 0.614b − 1.059a − 1.066a − 0.170a

(0.281) (0.090) (0.091) (0.031)
Country-level Controls YES YES YES YES
Fixed Effects Firm-country and Year
Observations 1,244,656 1,244,656 1,244,656 1,273,684

Notes. (b p-value<0.05; a p-value<0.01) Standard errors in parenthesis. This table shows the results using subsample of firms with more than 1
import origins. Column (1)–(4) shows the results on the import value, import scope (HS6), import scope (HS8) and import dummy respectively. The
real exchange rate (RER) volatility is computed as the log standard deviation of the annual exchange rate of the origin country’s currency against the
Chinese yuan. The country level control variables include the RER, GDP, GDP per capita and price index (CPI) of the origin country. All variables are
in logs except the exchange rate volatility. All the regressions include firm-destination and year fixed effects. The results are consistent with the results
above if we control for the firm-year fixed effects, or use the nominal exchange rate against Chinese yuan. Standard errors clustered at the firm level
are in parentheses.

Table 8
Financial vulnerability: Sub-sample with the number of import Origins>1.
Dependent Variable Value Scope(HS6) Scope(HS8) Import Status

(1) (2) (3) (4) (5) (6) (7) (8)

RER Volatility 0.088 6.410a − 0.672a 1.274 − 0.649a 1.209 − 0.136a − 0.153
(0.439) (2.048) (0.145) (0.702) (0.146) (0.708) (0.0393) (0.150)
× External Dependence − 2.459b − 1.362a − 1.442a − 0.060
(1.074) (0.370) (0.374) (0.082)
× Intangibility − 8.869a − 2.965a − 2.886a 0.0008
(2.568) (0.875) (0.883) (0.179)
Country-level Controls YES YES YES YES YES YES YES YES
Fixed Effects Firm-country and Year
Observations 1,159,494 1,159,494 1,159,494 1,159,494 1,159,494 1,159,494 1,101,129 1,101,129

Notes. (b p-value<0.05; a p-value<0.01) Standard errors in parenthesis. This table shows the results on the interaction with financial vulnerability
using samples of importers that import from more than one origin. Columns (1)–(2) show the results on the import value; Columns (3)–(4) and column
(5)–(6) show the results on the import scope (HS6 and HS8 respectively); Columns (7)–(8) show the results on the import dummy. The exchange rate
volatility is computed as the log standard deviation of the annual exchange rate of the destination country’s currency against the Chinese yuan. The
country-level control variables include the exchange rate, GDP, price index (CPI) and GDP per capita of the origin country. All variables are in logs
except the exchange rate volatility. All the regressions include firm-destination and year fixed effects. Standard errors clustered at the firm level are in
parentheses.

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Table 9
Intensive margin: Sub-sample with number of varieties (HS8)>1.
Dependent Variable Value Scope(HS6) Scope(HS8) Import Status

(1) (2) (3) (4)

a a a
RER Volatility − 1.349 − 1.757 − 1.761 − 0.080b
(0.344) (0.126) (0.127) (0.036)
Country-level Controls YES YES YES YES
Fixed Effects Firm-country and Year
Observations 767,398 767,398 767,398 702,619

Notes. (b p-value<0.05; a p-value<0.01). Robust standard errors in parenthesis. This table shows the results using subsample of firms with more than
1 import variety (defined at the HS8 level). Column (1)–(4) shows the results on the import value, import scope (HS6), import scope (HS8) and import
dummy respectively. The real exchange rate (RER) volatility is computed as the log standard deviation of the annual exchange rate of the origin
country’s currency against the Chinese yuan. The country level control variables include the RER, GDP, GDP per capita and price index (CPI) of the
origin country. All variables are in logs except the exchange rate volatility. All the regressions include firm-destination and year fixed effects. The
results are consistent with the results above if we control for the firm-year fixed effects, or use the nominal exchange rate against Chinese yuan.
Standard errors clustered at the firm level are in parentheses.

Table 10
Financial vulnerability: Sub-sample with number of varieties (HS8)>1.
Dependent Variable Value Scope(HS6) Scope(HS8) Import Status

(1) (2) (3) (4) (5) (6) (7) (8)

RER Volatility 0.666 9.400a − 1.321a 0.741 − 1.285a 0.612 − 0.006 0.137
(0.555) (2.808) (0.202) (1.068) (0.202) (1.070) (0.052) (0.237)
× External Dependence − 6.474a − 1.519a − 1.639a − 0.179
(1.304) (0.479) (0.480) (0.145)
× Intangibility − 13.526a − 3.190b − 3.035b − 0.246
(3.488) (1.317) (1.320) (0.298)
Country-level Controls YES YES YES YES YES YES YES YES
Fixed Effects Firm-country and Year
Observations 714,575 714,575 714,575 714,575 714,575 714,575 593,372 593,372

Notes. (b p-value<0.05; a p-value<0.01). Standard errors in parenthesis. This table shows the results on the interaction with financial vulnerability
using samples of importers that import for more than 1 variety (defined at HS8) level. Columns (1)–(2) show the results on the import value; Columns
(3)–(4) and column (5)–(6) show the results on the import scope (HS6 and HS8 respectively); Columns (7)–(8) show the results on the import dummy.
The exchange rate volatility is computed as the log standard deviation of the annual exchange rate of the destination country’s currency against the
Chinese yuan. The country-level control variables include the exchange rate, GDP, price index (CPI) and GDP per capita of the origin country. All
variables are in logs except the exchange rate volatility. All the regressions include firm-destination and year fixed effects. Standard errors clustered at
the firm level are in parentheses.

Table 11
Nominal exchange rate volatility and intermediate inputs imports.
Dependent Variable Value Scope(HS6) Scope(HS8) Import Status

(1) (2) (3) (4) (5) (6) (7) (8)

RER Volatility − 1.037a − 1.011a − 1.263a − 1.238a − 1.249a − 1.233a − 0.022 − 0.100a
(0.233) (0.241) (0.085) (0.082) (0.087) (0.083) (0.017) (0.027)
Country-level Controls NO YES NO YES NO YES NO YES
Fixed Effects Firm-country and Year
Observations 1,397,679 1,397,043 1,397,679 1,397,043 1,397,679 1,397,043 1,377,874 1,376,460

Notes. (b p-value<0.05; a p-value<0.01) Standard errors in parenthesis. This table shows the results on baseline specification using nominal exchange
rate volatility. Columns (1)–(2) show the results on the import value; Columns (3)–(4) and column (5)–(6) show the results on the import scope (HS6
and HS8 respectively); Columns (7)–(8) show the results on the import dummy. The nominal exchange rate volatility (NER) is computed as the log
standard deviation of the annual nominal exchange rate of the destination country’s currency against the Chinese yuan. The country-level control
variables include the exchange rate, GDP, price index (CPI) and GDP per capita of the origin country. All variables are in logs except the exchange rate
volatility. All the regressions include firm-destination and year fixed effects. Standard errors clustered at the firm level are in parentheses.

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Table 12
Nominal exchange rate volatility and financial vulnerability.
Dependent Variable Value Scope(HS6) Scope(HS8) Import Status

(1) (2) (3) (4) (5) (6) (7) (8)

a a
RER Volatility − 0.430 3.413 − 0.861 0.074 − 0.828 0.053 − 0.051 − 0.075
(0.361) (1.749) (0.120) (0.584) (0.116) (0.583) (0.035) (0.149)
× External Dependence − 2.533a − 1.570a − 1.679b − 0.104
(0.920) (0.309) (0.730) (0.082)
× Intangibility − 5.706a − 1.727b − 1.697b − 0.006
(2.194) (0.730) (0.730) (0.180)
Country-level Controls YES YES YES YES YES YES YES YES
Fixed Effects Firm-country and Year
Observations 1,278,268 1,278,268 1,278,268 1,278,268 1,278,268 1,278,268 1,161,916 1,161,916

Notes. (b p-value<0.05; a p-value<0.01) Standard errors in parenthesis. This table shows the results on the nominal exchange rate volatility inter­
acting with financial vulnerability. Columns (1)–(2) show the results on the import value; Columns (3)–(4) and column (5)–(6) show the results on the
import scope (HS6 and HS8 respectively); Columns (7)–(8) show the results on the import dummy. The nominal exchange rate volatility is computed
as the log standard deviation of the annual exchange rate of the destination country’s currency against the Chinese yuan. The country-level control
variables include the exchange rate, GDP, price index (CPI) and GDP per capita of the origin country. All variables are in logs except the exchange rate
volatility. All the regressions include firm-destination and year fixed effects. Standard errors clustered at the firm level are in parentheses.

Table 13
3-Months lagged RER volatility and imports.
Dependent Variable Value Scope(HS6) Scope(HS8) Import Status

(1) (2) (3) (4) (5) (6) (7) (8)

RER Volatility − 0.403b − 0.034 − 0.668a − 0.287a − 0.653a − 0.284a − 0.012 0.094
(0.173) (0.171) (0.065) (0.063) (0.064) (0.063) (0.061) (0.060)
Country-level Controls NO YES NO YES NO YES NO YES
Fixed Effects Firm-country and Year
Observations 1,290,013 1,289,399 1,290,013 1,289,399 1,290,013 1,289,399 1,232,846 1,231,536

Notes. (b p-value<0.05; a p-value<0.01) Standard errors in parenthesis. This table shows the results on baseline specification using 3-Month Lagged
real exchange rate volatility. Columns (1)–(2) show the results on the import value; Columns (3)–(4) and column (5)–(6) show the results on the
import scope (HS6 and HS8 respectively); Columns (7)–(8) show the results on the import dummy. The real exchange rate volatility (RER) is
computed as the log standard deviation of the annual exchange rate of the destination country’s currency against the Chinese yuan. The country-level
control variables include the exchange rate, GDP, price index (CPI) and GDP per capita of the origin country. All variables are in logs except the
exchange rate volatility. All the regressions include firm-destination and year fixed effects. Standard errors clustered at the firm level are in
parentheses.

Table 14
3-Months lagged RER volatility and financial vulnerability.
Dependent Variable Value Scope(HS6) Scope(HS8) Import Status

(1) (2) (3) (4) (5) (6) (7) (8)

RER Volatility 0.062 2.044 0.071 0.243 0.065 0.199 0.167 0.182
(0.281) (1.337) (0.102) (0.494) (0.101) (0.489) (0.101) (0.491)
× External Dependence − 0.395 − 1.111a − 1.073a − 0.187
(0.667) (0.245) (0.242) (0.245)
× Intangibility − 2.647 − 0.672 − 0.609 − 0.092
(1.670) (0.613) (0.606) (0.610)
Country-level Controls YES YES YES YES YES YES YES YES
Fixed Effects Firm-country and Year
Observations 1,180,597 1,180,597 1,180,597 1,180,597 1,180,597 1,180,597 1,034,548 1,034,548

Notes. (b p-value<0.05; a p-value<0.01) Standard errors in parenthesis. This table shows the results on the 3-Month Lagged real exchange rate
volatility interacting with financial vulnerability. Columns (1)–(2) show the results on the import value; Columns (3)–(4) and column (5)–(6) show
the results on the import scope (HS6 and HS8 respectively); Columns (7)–(8) show the results on the import dummy. The 3-Month Lagged real
exchange rate volatility is computed as the 3-Month lagged log standard deviation of the annual exchange rate of the destination country’s currency
against the Chinese yuan. The country-level control variables include the exchange rate, GDP, price index (CPI) and GDP per capita of the origin
country. All variables are in logs except the exchange rate volatility. All the regressions include firm-destination and year fixed effects. Standard errors
clustered at the firm level are in parentheses.

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Table 15
Alternative measures for extensive margins.
Dependent Variable Entry Dummy Exit Dummy

(1) (2) (3) (4) (5) (6)

a a a
RER Volatility − 0.111 0.056 1.010 0.261 − 0.023 − 0.169
(0.026) (0.044) (0.224) (0.057) (0.094) (0.465)
× External Dependence − 0.549a 0.953a
(0.118) (0.234)
× Intangibility − 1.394a 0.544
(0.280) (0.579)
Country-level Controls YES YES YES YES YES YES
Fixed Effects Firm-country and Year
Observations 4,115,110 3,401,223 3,401,223 2,128,685 1,892,307 1,892,307

Notes. (b p-value<0.05; a p-value<0.01). Standard errors in parenthesis. This table shows the results on the extensive margin of entry and exit
dummy. The exchange rate volatility is computed as the log standard deviation of the annual exchange rate of the origin country’s currency against
the Chinese yuan. The country-level control variables include the exchange rate, GDP, price index (CPI) and GDP per capita of the origin country. All
variables are in logs except the exchange rate volatility. All the regressions include firm-destination and year fixed effects. Standard errors clustered at
the firm level are in parentheses.

Table 16
Financial development and RER volatility.
Dependent Variable Value Scope(HS6) Scope(HS8) Import Status

(1) (2) (3) (4)

a a a
RER Volatility − 2.324 − 2.654 − 2.623 − 0.064
(0.672) (0.248) (0.250) (0.049)
× Financial Development 0.135a 0.115a 0.113a − 0.026
(0.047) (0.017) (0.017) (0.029)
Country-level Controls YES YES YES YES
Fixed Effects Firm-country and Year
Observations 1,392,935 1,392,935 1,392,935 1,059,417

Notes. (b p-value<0.05; a p-value<0.01). Robust standard errors in parenthesis. This table shows the results interacted with financial development
level indicators as defined in the empirical section. Column (1)–(4) shows the results on the import value, import scope (HS6), import scope (HS8) and
import dummy respectively. The real exchange rate (RER) volatility is computed as the log standard deviation of the annual exchange rate of the
origin country’s currency against the Chinese yuan. The country level control variables include the RER, GDP, GDP per capita and price index (CPI) of
the origin country. All variables are in logs except the exchange rate volatility. All the regressions include firm-destination and year fixed effects. The
results are consistent with the results above if we control for the firm-year fixed effects, or use the nominal exchange rate against Chinese yuan.
Standard errors clustered at the firm level are in parentheses.

exchange rate volatility. We replicate our main regressions using the nominal exchange rate volatility that excludes the change of CPI.
Tables 11 and 12 report the relevant results. As we obtain similar results with comparable magnitudes of effects, the estimations are
robust to the alternative specification of the exchange rate.

Table 17
Robustness check: Subsample with positive export.
Dependent Variable Entry Dummy Exit Dummy

(1) (2) (3) (4) (5) (6)

RER Volatility 0.309 6.235a − 0.701a 1.558b − 0.678a 1.473b

(0.446) (2.140) (0.148) (0.724) (0.149) (0.730)
× External Dependence − 2.645b − 1.461a − 1.537a
(1.083) (0.373) (0.377)
× Intangibility − 8.452a − 3.400a − 3.293a
(2.684) (0.904) (0.912)
Country-level Controls YES YES YES YES YES YES
Fixed Effects Firm-country and Year
Observations 1,150,662 1,150,662 1,150,662 1,150,662 1,150,662 1,150,662

Notes. (b p-value<0.05; a p-value<0.01). Robust standard errors in parenthesis.

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Table 18
Robustness check: Control for firm-origin and firm-year fixed effects.
Dependent Variable Value Scope(HS6) Scope(HS8) Import Status

(1) (2) (3) (4) (5) (6) (7) (8)

b b a a a a
RER Volatility − 0.697 − 0.704 − 1.070 − 1.020 − 1.072 − 1.025 − 0.021 − 0.105a
(0.300) (0.301) (0.096) (0.096) (0.096) (0.097) (0.016) (0.027)
Country-level Controls NO YES NO YES NO YES NO YES
Fixed Effects Firm-country and Firm-year
Observations 1,199,062 1,198,421 1,199,062 1,198,421 1,199,062 1,198,421 1,060,712 1,059,417

Notes. (b p-value<0.05; a p-value<0.01). Standard errors in parenthesis. This table shows the results with controls for Firm-origin and Firm-year
Fixed Effect. Columns (1)–(2) show the results on the import value; Columns (3)–(4) and column (5)–(6) show the results on the import scope
(HS6 and HS8 respectively); Columns (7)–(8) show the results on the import dummy. The 3-Month Lagged real exchange rate volatility is computed as
the log standard deviation of the annual exchange rate of the destination country’s currency against the Chinese yuan. The country-level control
variables include the exchange rate, GDP, price index (CPI) and GDP per capita of the origin country. All variables are in logs except the exchange rate
volatility. All the regressions include firm-destination and firm-year fixed effects. Standard errors clustered at the firm level are in parentheses.

5.3. Lagged effects

Generally, the timing length of the shipment customs clearance varies from several weeks to three months. Suppose the import
contract is signed before the shipment of goods while the payment is made after the shipment. In that case, the exchange rate risk will
emerge when the exchange rate fluctuates between the contract initiation and the payment completion.
To determine whether to sign the importing contract, an importing firm needs to make a rational expectation on the spot exchange
rate on the date when the transaction is to be completed, and payment made. This expectation is usually made based on the currency
period’s exchange rate and exchange rate volatility. In this case, the exchange rate volatility realized several months prior will in­
fluence the transaction in the current period.
In our main regressions, the exchange rate volatility and import performance are measured in the same transaction year. This is
because the exchange rate risk is a short-run influencing factor and only effective for up to several months. We check the effect of the 3-
months lagged exchange rate (longest shipment time) on the import for robustness. Tables 13 and 14 report the relevant results.
According to the results, we still observe a significantly negative effect of the exchange rate volatility on imports even though we use
the largest lagged period.

5.4. Alternative measure for the extensive margin

Another concern on our estimation is whether the results are sensitive to the indicator’s specification for extensive margin. To test
the robustness, we re-construct the extensive margin indicator as either an entry dummy or an exit dummy. The entry dummy takes
value ‘1’ when a firm starts to import at time t but did not at time t − 1, and takes value ‘0′ when there is zero import value. Alter­
natively, an exit dummy takes value ‘1’ when a firm starts to import at time t− 1 but did not at time t, and takes value ‘0’ when there is a
positive import value. Using these indicators, we replicate our main regressions and report the relevant results in Table 15. The
estimation results are consistent with our main estimations. A higher level of exchange rate volatility is associated with lower entry
probability, while higher exit probability. A higher financial vulnerability depends these effects.

5.5. Robustness of the specification of financial vulnerability

Another concern on our estimations is whether our financial vulnerability estimation results are robust to alternative specifications
of the financial vulnerability indexes. Specifically, there are two concerns. First, the COMPUSTAT’s public firm data are retrieved from
the U.S. market, while our study uses the sample of Chinese firms. For robustness check, we use China’s provincial financial devel­
opment index to roughly represent the firm’s financial vulnerability level. The idea is that, a better financially developed environment
will allow firms to access external financing with lower interest rates and collateral requirements. Thus, a higher level of financial
development means a lower level of financial vulnerability.
Table 16 reports the relevant results. We observe a significantly positive coefficient on the interaction between financial devel­
opment and exchange rate volatility, which indicates a consistent result with our main regressions. Second, because the financial
vulnerability indexes are computed based on the export value shares of different products, the extensive export margin change may
lead to misspecification of the indexes. For example, in the years when the firm’s export value is zero, its financial vulnerability is
constructed based on the other years’ data. We drop the samples with zero export value and replicate our main regressions using the
rest of the sample to address this concern. Table 17 reports the relevant results and shows that our results, using this measure, are
consistent with our main estimations.

5.6. Controlling for firm-year fixed effects

The last concern we address is the potential estimation bias due to the exclusion of controls for the time-variant firm characteristics.

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In response to this concern, we replicate our main estimations while controlling for both firm-country and firm-year fixed effects
simultaneously. The relevant results are reported in Table 18. Unsurprisingly, we observe consistent results with our main estimations.
There is robust evidence from the forgoing discussion that exchange rate volatility plays an important role in firm import of in­
termediate inputs. Specifically, an increase in exchange rate volatility is associated with lower import values and smaller variety of
intermediate inputs imported. This has implication on the growth of firms, their survival and the variety of final goods that can be
produced within the economy.

6. Conclusion

Empirical evidence and theoretical discussions on the relationship between exchange rate volatility and firms’ importing behavior
are incomplete. The importance of foreign inputs in the production process as well as the technological transfer advantage of using
foreign inputs makes the pursuit for a deeper understanding of the factors affecting the import and use of intermediate inputs an
important study.
We fill up the gaps that exist in the literature by examining how exchange rate volatility affects firm import of intermediate inputs.
To achieve this, we rely on Chinese firm-level import data together with bilateral exchange rate and country-level macro data to
empirically examine the effect of exchange rate volatility on imports. We reach three key empirical findings: (i) firms reduce their
intensive import margins in response to a volatile exchange rate i.e. import value and import varieties are lower from countries with a
higher level of exchange rate volatility; (ii) the negative effect on the intensive margin is more pronounced on firms with a higher level
of financial vulnerability; and (iii) a significantly negative effect on the extensive import margin is found in private and foreign-owned
firms.
These findings raise several important questions and policy implications. For instance, does supplier relationships matter in this
relationship between exchange rate volatility and imports? It is reasonable to think that more established supplier relationships may
ameliorate the negative impact of a volatile exchange rate on buyers of intermediate inputs and lead to more desirable outcomes. We
are not able to explore this mechanism due to data limitation. Second, are the welfare implications from a more stable exchange rate
for importers of intermediate inputs great enough to justify considerations of pegged exchange rate regimes? These are open questions
that require further exploration.
To summarize, our study contributes to the existing literature in twofold: (i) we provide empirical evidence from Chinese firms
previously not analyzed. Given China’s importance in the global trade network, this is a significant contribution. (ii) To the best of our
knowledge, we are the first to provide evidence on exchange rate volatility and its effect on import scope. Our empirical findings
suggest that exchange rate volatility increases firms’ import costs and increases their production costs by impeding the import of
intermediate inputs. We posit that a relatively more stable exchange rate scheme or a better financial development will reduce such
costs.

Appendix A. Supplementary data

Supplementary data related to this article can be found at https://doi.org/10.1016/j.iref.2022.06.012.

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