Gains from international trade can arise if countries specialize according to their
comparative advantages. Following the idea of heterogeneous firms we investigate the
determinants of necessary reallocations at the firm level after trade liberalization. In
our theoretical model, poor entrepreneurs run smaller firms, invest less in product
change, and are more likely to exit the market. Decreasing trade costs exacerbate
these characteristics. Using firm-level panel data on seven Latin American countries
for 2006 and 2010, we show that our theoretical predictions match with observed firm
characteristics. In addition, we present novel empirical evidence showing that in the
sample of surviving enterprises, financially constrained firms are less likely to change
their main product, especially if they rely heavily on external funds. This finding adds
another dimension to the literature on how financial constraints distort reallocations
within firms and thus can limit gains from trade.