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FDI and credit constraints : firm level evidence in China

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Author Info
Jérôme Héricourt () (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EQUIPPE - Université de Lille - Université des Sciences et Technologies de Lille - Lille I)
Sandra Poncet () (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique)

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Abstract

In this paper, we analyze whether incoming foreign investment in China plays an important role in alleviating domestic firms' credit constraints. Access to external finance is a crucial determinant of business expansion. Using firm-level data on 2,200 domestic companies for the period 1999-2002, we investigate the extent to wich firms are financially constrainted and whether direct foreign investment relaxes financing constraints of firms. When we split 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 fincancing constraints tend to ease in a context of abundant foreign investment.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00144621_v1.

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Date of creation: Feb 2007
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Keywords: Financial constraint; corporate finance; Foreign Direct Investment.;

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References listed on IDEAS
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Cited by:
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  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!]
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  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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