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FDI and Credit Constraints: Firm Level Evidence in China

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Author Info
Jerome Hericourt
Sandra Poncet

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Abstract

In this paper, we assess the success of the ongoing financial system reforms in China through the investigation of the extent to which firms are financially constrained. We focus on the part played by Foreign Direct Investment (FDI) in funding Chinese corporate sector as we analyze whether incoming foreign investment in China plays an important role in alleviating domestic firms’ credit constraints. Using firm-level data on 2,200 domestic companies for the period 1999-2002 and splitting domestic firms into public and private firms, we find that public firms’ investment decisions are not sensitive to debt ratios or the cost of debt. Nor is there any evidence that public firms are affected by foreign firms presence. We interpret this as evidence in support of the notion of a soft budget constraint for public firms. In contrast, private domestic firms appear more credit constrained than state-owned firms but their financing constraints tend to ease in a context of abundant foreign investment. Our results confirm that the development of cross-border relationships with foreign firms helps private domestic firms to bypass both the financial and legal obstacles that they face at home(Huang, 2003).

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Paper provided by CEPII research center in its series Working Papers with number 2007-11.

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Date of creation: May 2007
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Handle: RePEc:cii:cepidt:2007-11

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Related research
Keywords: Financial constraint; corporate finance; Foreign Direct Investment; China; banking system; financial markets; credit;

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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Johan F.M. Swinnen & Anneleen Vandeplas & Miet Maertens, 2009. "Liberalization with Endogenous Institutions: A Comparative Analysis of Agricultural Reform in Africa, Asia, and Europe," LICOS Discussion Papers 23309, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
    Other versions:
  2. Guariglia, Alessandra & Liu, Xiaoxuan & Song, Lina, 2008. "Internal Finance and Growth: Microeconometric Evidence on Chinese Firms," IZA Discussion Papers 3808, Institute for the Study of Labor (IZA). [Downloadable!]
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