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Does direct foreign investment affect domestic credit constraints?

In: Globalization, Firms, and Workers

Author

Listed:
  • Ann E. Harrison
  • Margaret S. McMillan

Abstract

Firms in developing countries cite credit constraints as one of their primary obstacles to investment. Direct foreign investment may ease credit constraints by bringing in scarce capital. Alternatively, if foreign firms borrow heavily from domestic banks, they may crowd local firms out of domestic capital markets. Using firm data from the Ivory Coast, we test whether: (1) domestic firms are more credit constrained than foreign firms, and (2) whether borrowing by foreign firms exacerbates domestic firm credit constraints. Results provide support for both hypotheses. We also find that state-owned enterprises (SOEs) are less financially constrained than other domestic enterprises.

Suggested Citation

  • Ann E. Harrison & Margaret S. McMillan, 2022. "Does direct foreign investment affect domestic credit constraints?," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 7, pages 153-180, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811239472_0007
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    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F6 - International Economics - - Economic Impacts of Globalization
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development

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