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FDI, market signal and financing constraints of firms in China

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  • Lin Chen
  • Changyuan Luo

Abstract

On the basis of an augmented Euler equation, we use firm survey data provided by the World Bank to investigate the impact of FDI (foreign direct investment) on the financing constraints of firms in China. First we calculate the forward and backward linkages of FDI. Then through empirical estimation, we find that only private firms have financing constraints and that the incoming FDI alleviates this situation. Private firms with more foreign capital shares or having stronger vertical linkage with FDI can get financial resources easily. Furthermore, industries hosting a large amount of FDI are favorite clients of the financial institutions because they are usually much more competitive in the world. As a result, the private firms in these industries also have easier access to financial resources. In the financial market, FDI is a helping hand that reduces the information asymmetry between firms and financial institutions. Financial resources go where FDI goes, which to some extent improves the allocation efficiency.

Suggested Citation

  • Lin Chen & Changyuan Luo, 2014. "FDI, market signal and financing constraints of firms in China," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 23(5), pages 579-599, August.
    • Handle: RePEc:taf:jitecd:v:23:y:2014:i:5:p:579-599
    DOI: 10.1080/09638199.2013.836239
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    Cited by:

    1. Meng, Qingbin & Li, Xinyu & Chan, Kam C. & Gao, Shenghao, 2020. "Does short selling affect a firm's financial constraints?," Journal of Corporate Finance, Elsevier, vol. 60(C).
    2. Qiubin Huang & Mengyuan Xiong & Ming Xiao, 2022. "Does managerial ability affect corporate financial constraints? Evidence from China," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 35(1), pages 3731-3753, December.

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