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Inward FDI and Financial Constraints in Central and East European Countries

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  • Aleksander Rutkowski

Abstract

This study examines whether domestically owned firms in Central and Eastern European countries (CEECs) confronted higher financial constraints in their investments than did foreign-owned enterprises, and whether the domestic enterprises' financial constraints were caused by incoming foreign direct investment (FDI). In theory, foreign investment may be needed to bring in capital only initially; the subsequent investment can be financed locally. On the other hand, foreign-owned companies may be more attractive borrowers, crowding out domestic firms from imperfect host-country capital markets. Both hypotheses, however, are rejected, as the results are not consistent across different dependent variables and verification methods. There is some evidence that FDI reduced foreign subsidiaries' constraints without increasing the constraints suffered by the domestic enterprises. Tests are performed with regressions based on two alternative firm-level models, a direct one using perception-based assessment of the constraints, and an indirect one with financial indicators.

Suggested Citation

  • Aleksander Rutkowski, 2006. "Inward FDI and Financial Constraints in Central and East European Countries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 42(5), pages 28-60, October.
    • Handle: RePEc:mes:emfitr:v:42:y:2006:i:5:p:28-60
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    Cited by:

    1. Lorenzo Bencivelli & Beniamino Pisicoli, 2021. "Foreign investors and target firms’ financial structure: cavalry or locusts?," Temi di discussione (Economic working papers) 1327, Bank of Italy, Economic Research and International Relations Area.
    2. Lorenzo Bencivelli & Beniamino Pisicoli, 2022. "Foreign investors and target firms’ financial structure," International Economics, CEPII research center, issue 169, pages 230-251.

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