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FDI inflow and financial costs of local firms

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  • Yu Wu
  • Xiao Li
  • Yan Zhang
  • Kai Li

Abstract

This study investigates the impact of foreign direct investment (FDI) inflow on the financial costs of local firms. We develop a simple theoretical model for the banking market to illustrate the decrease in financial costs after FDI inflow. The model’s predictions are then verified by analyzing bank lending data of six cities in an Eastern Chinese province for the period 2010–2015. Our results show that (1) the financial costs of FDI recipients and local firms decline with FDI inflow; (2) among local firms, private-owned firms and micro-, small- and medium-sized enterprises experience a greater drop in financial costs than state-owned firms and (3) Cost of liquid loans (short- and mid-term loans) decreases more than that of long-term loans.

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  • Yu Wu & Xiao Li & Yan Zhang & Kai Li, 2019. "FDI inflow and financial costs of local firms," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 24(4), pages 515-529, October.
    • Handle: RePEc:taf:rjapxx:v:24:y:2019:i:4:p:515-529
    DOI: 10.1080/13547860.2019.1665329
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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. Pan, Xuefeng & Wu, Weixing, 2022. "Can capital inflows reduce financing costs in emerging economies? Firm-level evidence from China and Malaysia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).

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