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Global Capital Flows and Financing Constraints

  • Ann E. Harrison
  • Inessa Love
  • Margaret S. McMillan

Firms often cite financing constraints as one of their primary obstacles to investment. Global capital flows, by bringing in scarce capital, may ease host-country firms' financing constraints. However, if incoming foreign investors borrow heavily from domestic basnks, direct foreign investment (DFI) may exacerbate financing constraints by crowding host country firms out of domestic capital markets. Combininb a unique cross-country firm-level panel with time-series data on restrictions on international transactions and capital flows, we find that different measures of global flows are associated with a reduction in firm-level financing constraints. First, we show that one type of capital inflow--DFI--is associated with a reduction in financing constraints. Second, we test whether restrictions on international transactions affect firms' financing constraints. Our results suggest that only one type of restriction--those on capital account transactions--negatively affect firms' financing constraints. We also show that multinational firms are not financially constrained and do not appear to be sensitive to the level of DFI. This implies that DFI eases financing constraints for non-multinational firms. Finally, we show that DFI only eases financing constraints in the non-G7 countries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8887.

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Date of creation: Apr 2002
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Publication status: published as Harrison, Ann E., Inessa Love and Margaret S. McMillan. "Global Capital Flows And Financing Constraints," Journal of Development Economics, 2004, v75(1,Oct), 269-301.
Handle: RePEc:nbr:nberwo:8887
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