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FDI and credit constraints: firm level evidence in China

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  • Jérôme Héricourt

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, EQUIPPE - Economie Quantitative, Intégration, Politiques Publiques et Econométrie - Université de Lille, Sciences et Technologies - Université de Lille, Sciences Humaines et Sociales - PRES Université Lille Nord de France - Université de Lille, Droit et Santé)

  • Sandra Poncet

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

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.

Suggested Citation

  • Jérôme Héricourt & Sandra Poncet, 2007. "FDI and credit constraints: firm level evidence in China," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00144621, HAL.
    • Handle: RePEc:hal:cesptp:halshs-00144621
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00144621v1
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    Cited by:

    1. Sevcan Yesiltas, 2009. "Financing Constraints and Investment: The Case of Turkish Manufacturing Firms," 2009 Meeting Papers 874, Society for Economic Dynamics.
    2. Olena Havrylchyk & Sandra Poncet, 2007. "Foreign Direct Investment in China: Reward or Remedy?," The World Economy, Wiley Blackwell, vol. 30(11), pages 1662-1681, November.
    3. Frijters, Paul & Kong, Tao Sherry & Meng, Xin, 2011. "Migrant Entrepreneurs and Credit Constraints under Labour Market Discrimination," IZA Discussion Papers 5967, IZA Network @ LISER.
    4. Sandra M. Leitner, 2015. "Firm growth and financing constraints in the NMS-10 and the Western Balkan countries – a comparative analysis," wiiw Balkan Observatory Working Papers 115, The Vienna Institute for International Economic Studies, wiiw.
    5. Subhayu Bandyopadhyay & Sajal Lahiri & Javed Younas, 2012. "Do countries with greater credit constraints receive more foreign aid?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 481-493.
    6. Majeed, Muhammad Tariq & MacDonald, Ronald, 2010. "Corruption and the Military in Politics: Theory and Evidence from around the World," SIRE Discussion Papers 2010-91, Scottish Institute for Research in Economics (SIRE).
    7. Guariglia, Alessandra & Liu, Xiaoxuan & Song, Lina, 2011. "Internal finance and growth: Microeconometric evidence on Chinese firms," Journal of Development Economics, Elsevier, vol. 96(1), pages 79-94, September.
    8. Wang, Daili, 2013. "鼓励还是抑制？初探外商直接投资与新民营企业进入 [Foreign Direct Investment and the Entry of New Firms]," MPRA Paper 50984, University Library of Munich, Germany.
    9. Wong Mike C. W. & Chen Steven X. G. & Choy Lennon H. T., 2019. "Transforming China by Chinese Enterprises through Foreign Direct Investment: Experience of Hong Kong Real Estate Developers," Man and the Economy, De Gruyter, vol. 6(1), pages 1-33, June.
    10. Michael Landesmann & Sandra M. Leitner & Robert Stehrer, 2016. "Changing Patterns in M&E-Investment-Based Innovation Strategies in CESEE and FSU Countries," wiiw Working Papers 123, The Vienna Institute for International Economic Studies, wiiw.
    11. Ding, Sai & Guariglia, Alessandra & Knight, John, 2013. "Investment and financing constraints in China: Does working capital management make a difference?," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1490-1507.
    12. Poncet, Sandra & Steingress, Walter & Vandenbussche, Hylke, 2010. "Financial constraints in China: Firm-level evidence," China Economic Review, Elsevier, vol. 21(3), pages 411-422, September.
    13. 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.
    14. Bandyopadhyay, Subhayu & Lahiri, Sajal & Younas, Javed, 2011. "Should Easier Access to International Credit Replace Foreign Aid?," IZA Discussion Papers 6024, IZA Network @ LISER.
    15. Thierry Pairault, 2010. "Le rôle des investissements directs étrangers entrants et sortants en Chine : une appréciation," Post-Print halshs-00982768, HAL.
    16. Sandra M. Leitner & Robert Stehrer, 2015. "What Determines SMEs’ Funding Obstacles to Bank Loans and Trade Credits?," wiiw Working Papers 114, The Vienna Institute for International Economic Studies, wiiw.
    17. Skott, Peter & Gómez-Ramírez, Leopoldo, 2018. "Credit constraints and economic growth in a dual economy," Structural Change and Economic Dynamics, Elsevier, vol. 45(C), pages 64-76.
    18. Françoise Lemoine & Deniz Ünal-Kesenci, 2007. "China and India in International Trade: from Laggards to Leaders?," Working Papers 2007-19, CEPII research center.
    19. Sandra M. Leitner & Robert Stehrer, 2013. "Access to finance and funding composition during the crisis: A firm-level analysis of Latin American countries," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 50(1), pages 1-47, May.
    20. Guariglia, Alessandra & Poncet, Sandra, 2008. "Could financial distortions be no impediment to economic growth after all? Evidence from China," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 633-657, December.
    21. Sandra M. Leitner & Robert Stehrer, 2012. "Access to Finance and Composition of Funding during the Crisis: A firm-level analysis for Latin American countries," wiiw Working Papers 78, The Vienna Institute for International Economic Studies, wiiw.
    22. Isabelle Bensidoun & Françoise Lemoine & Deniz Ünal, 2009. "The integration of China and India into the world economy: a comparison," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 6(1), pages 131-155, June.
    23. Robert C. Feenstra & Zhiyuan Li & Miaojie Yu, 2014. "Exports and Credit Constraints under Incomplete Information: Theory and Evidence from China," The Review of Economics and Statistics, MIT Press, vol. 96(4), pages 729-744, October.

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    Keywords

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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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