This study challenges a central assumption of standard trade models: constant marginal cost technology. We present evidence consistent with the view that increasing marginal cost is present in the data, and further identify Önancial and physical capacity constraints as the main sources of increasing marginal costs. To understand and quantify the importance of increasing marginal costs faced by Önancially and physically constrained exporters, we develop a novel structural estimation framework that incorporates these micro frictions. Our structural estimates suggest that the presence of such capacity constrained Örms can (1) reduce aggregate output responses to external demand shocks by 30% and (2) result in welfare loss by around 23%.