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Financial Constraints and the Margins of FDI

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  • Claudia M. Buch
  • Iris Kesternich

    ()

  • Alexander Lipponer

    ()

Abstract

Recent literature on multinational firms has stressed the importance of low productivity as a barrier to the cross-border expansion of firms. But firms may also need external fi-nance to shoulder the costs of entering foreign markets. We develop a model of multina-tional firms facing real and financial barriers to foreign direct investment (FDI), and we analyze their impact on the FDI decision (the extensive margin) and foreign affiliate sales (the intensive margin). We provide empirical evidence based on a detailed dataset of German multinationals which contains information on parent-level and affiliate-level financial constraints as well as about the location the foreign affiliates. We find that fi-nancial factors constrain firms’ foreign investment decisions, an effect felt in particular by large firms. Financial constraints at the parent level matter for the extensive, but less so for the intensive margin. For the intensive margin, financial constraints at the affiliate level are relatively more important.

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Bibliographic Info

Paper provided by Institut für Angewandte Wirtschaftsforschung (IAW) in its series IAW Discussion Papers with number 54.

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Length: 48 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:iaw:iawdip:54

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Keywords: multinational firms; heterogeneity; productivity; financial con-straints;

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References

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  1. Buch, Claudia M. & Kesternich, Iris & Lipponer, Alexander & Schnitzer, Monika, 2010. "Exports Versus FDI Revisited: Does Finance Matter?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 340, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  2. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165 Elsevier.
  3. James R. Brown & Steven M. Fazzari & Bruce C. Petersen, 2009. "Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom," Journal of Finance, American Finance Association, vol. 64(1), pages 151-185, 02.
  4. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jenson & Samuel Kortum, 2000. "Plants and Productivity in International Trade," NBER Working Papers 7688, National Bureau of Economic Research, Inc.
  5. Sandro Brusco & Fausto Panunzi, 2002. "Reallocation of Corporate Resources and Managerial Incentives in Internal Capital Markets," CESifo Working Paper Series 735, CESifo Group Munich.
  6. Gianmarco Ottaviano & Thierry Mayer, . "The happy few: the internationalisation of European firms," Blueprints, Bruegel, number 12, October.
  7. repec:hal:cesptp:halshs-00321632 is not listed on IDEAS
  8. Berman, Nicolas & Héricourt, Jérôme, 2010. "Financial factors and the margins of trade: Evidence from cross-country firm-level data," Journal of Development Economics, Elsevier, vol. 93(2), pages 206-217, November.
  9. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  10. Bayraktar, Nihal & Sakellaris, Plutarchos & Vermeulen, Philip, 2005. "Real versus financial frictions to capital investment," Working Paper Series 0566, European Central Bank.
  11. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  12. Thomas Chaney, 2007. "Liquidity Constrained Exporters," 2007 Meeting Papers 979, Society for Economic Dynamics.
  13. Russ, Katheryn Niles, 2007. "The endogeneity of the exchange rate as a determinant of FDI: A model of entry and multinational firms," Journal of International Economics, Elsevier, vol. 71(2), pages 344-372, April.
  14. Russ, Katheryn, 2004. "The Endogeneity of the Exchange Rate as a Determinant of FDI: A Model of Money, Entry, and Multinational Firms," Santa Cruz Department of Economics, Working Paper Series qt9xr4f238, Department of Economics, UC Santa Cruz.
  15. Ann E. Harrison & Inessa Love & Margaret S. McMillan, 2002. "Global Capital Flows and Financing Constraints," NBER Working Papers 8887, National Bureau of Economic Research, Inc.
  16. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  17. Kaplan, Steven N & Zingales, Luigi, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 169-215, February.
  18. Greenaway, David & Guariglia, Alessandra & Kneller, Richard, 2007. "Financial factors and exporting decisions," Journal of International Economics, Elsevier, vol. 73(2), pages 377-395, November.
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Citations

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Cited by:
  1. Peters, Katrin & Schnitzer, Monika, 2012. "Trade liberalization and credit constraints: Why opening up may fail to promote convergence," CEPR Discussion Papers 8942, C.E.P.R. Discussion Papers.
  2. Li Junjiang & Hou Lei & Zhang Jiarui, 2011. "Capital endowment, credit constraint and FDI: Analysis based on heterogeneous firms," Frontiers of Economics in China, Springer, vol. 6(1), pages 55-75, March.
  3. Joachim Wagner, 2012. "Credit constraints and exports: Evidence for German manufacturing enterprises," Working Paper Series in Economics 251, University of Lüneburg, Institute of Economics.
  4. Wagner, Joachim & Gelübcke, John P. Weche, 2013. "Credit Constraints, Foreign Ownership, and Foreign Takeovers in Germany," Working Paper Series in Economics and Institutions of Innovation 329, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  5. Joachim Wagner, 2013. "Credit constraints and exports: A survey of empirical studies using firm level data," Working Paper Series in Economics 287, University of Lüneburg, Institute of Economics.

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