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Financial constraints and foreign direct investment: firm-level evidence

Author

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  • Buch, Claudia M.
  • Kesternich, Iris
  • Lipponer, Alexander
  • Schnitzer, Monika

Abstract

Low productivity is an important barrier to the cross-border expansion of firms. But firms may also need external finance to shoulder the costs of entering foreign markets. We develop a model of multinational firms facing real and financial barriers to foreign direct investment (FDI), and we analyze their impact on the FDI decision. Theoretically, we show that financial constraints can affect highly productive firms more than firms with low productivity because the former are more likely to expand abroad. We provide empirical evidence based on a detailed dataset of German domestic and multinational firms which contains information on parent-level financial constraints as well as on the location the foreign affiliates. We find that financial factors constrain firms’ foreign investment decisions, an effect felt in particular by firms most likely to consider investing abroad. The locational information in our dataset allows exploiting cross-country differences in contract enforcement. Consistent with theory, we find that poor contract enforcement in the host country has a negative impact on FDI decisions.

Suggested Citation

  • Buch, Claudia M. & Kesternich, Iris & Lipponer, Alexander & Schnitzer, Monika, 2014. "Financial constraints and foreign direct investment: firm-level evidence," Munich Reprints in Economics 19977, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenar:19977
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    Cited by:

    1. Raff, Horst & Ryan, Michael & Stähler, Frank, 2018. "Financial frictions and foreign direct investment: Evidence from Japanese microdata," Journal of International Economics, Elsevier, vol. 112(C), pages 109-122.
    2. repec:bap:journl:180207 is not listed on IDEAS
    3. Kandilov, Ivan T. & Leblebicioğlu, Asli & Petkova, Neviana, 2016. "The impact of banking deregulation on inbound foreign direct investment: Transaction-level evidence from the United States," Journal of International Economics, Elsevier, vol. 100(C), pages 138-159.
    4. Unger, Florian, 2016. "The Role of Financial Intermediation in International Trade," Annual Conference 2016 (Augsburg): Demographic Change 145855, Verein für Socialpolitik / German Economic Association.
    5. Philippe Askenazy & Aida Caldera & Guillaume Gaulier & Delphine Irac, 2015. "Financial constraints and foreign market entries or exits: firm-level evidence from France," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 151(2), pages 231-253, May.
    6. Nadine Levratto & Clarisse Nguedam Ntouko & Maarouf Ramadan, 2017. "Institutions and firms’ internationalization: an empirical analysis on three Middle East countries," EconomiX Working Papers 2017-37, University of Paris Nanterre, EconomiX.
    7. repec:bla:econpa:v:37:y:2018:i:4:p:429-442 is not listed on IDEAS
    8. Cuadros, Ana & Martín-Montaner, Joan & Paniagua, Jordi, 2016. "Homeward bound FDI: Are migrants a bridge over troubled finance?," Economic Modelling, Elsevier, vol. 58(C), pages 454-465.
    9. repec:spr:empeco:v:53:y:2017:i:4:d:10.1007_s00181-016-1174-5 is not listed on IDEAS
    10. repec:tpr:adbadr:v:35:y:2018:i:1:p:108-132 is not listed on IDEAS
    11. Awaworyi Churchill, Sefa & Smyth, Russell, 2017. "Ethnic Diversity and Poverty," World Development, Elsevier, vol. 95(C), pages 285-302.
    12. repec:eee:chieco:v:47:y:2018:i:c:p:47-64 is not listed on IDEAS
    13. repec:spr:empeco:v:56:y:2019:i:3:d:10.1007_s00181-017-1380-9 is not listed on IDEAS
    14. Donaubauer, Julian & Neumayer, Eric & Nunnenkamp, Peter, 2016. "Financial market development in host and source countries and its effects on bilateral FDI," Kiel Working Papers 2029, Kiel Institute for the World Economy (IfW).

    More about this item

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • G2 - Financial Economics - - Financial Institutions and Services

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