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Financial Constraints and the Margins of FDI

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

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 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 (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 on the location the foreign affiliates. We find that financial 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.

Suggested Citation

  • Buch, Claudia M. & Kesternich, Iris & Lipponer, Alexander & Schnitzer, Monika, 2009. "Financial Constraints and the Margins of FDI," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 272, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  • Handle: RePEc:trf:wpaper:272
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Joachim Wagner, 2014. "Credit constraints and exports: evidence for German manufacturing enterprises," Applied Economics, Taylor & Francis Journals, vol. 46(3), pages 294-302, January.
    2. Deniz Baglan & Hakan Yilmazkuday, 2016. "Financial Health and the Intensive Margin of Trade," Working Papers 1607, Florida International University, Department of Economics.
    3. Horst Raff & Michael Ryan & Frank Stähler, 2015. "Financial Frictions and Foreign Direct Investment: Theory and Evidence from Japanese Microdata," CESifo Working Paper Series 5260, CESifo Group Munich.
    4. Katrin Peters & Monika Schnitzer, 2015. "Trade liberalization and credit constraints: Why opening up may fail to promote convergence," Canadian Journal of Economics, Canadian Economics Association, vol. 48(3), pages 1099-1119, August.
    5. Desbordes, Rodolphe & Wei, Shang-Jin, 2017. "The effects of financial development on foreign direct investment," Journal of Development Economics, Elsevier, pages 153-168.
    6. 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, pages 138-159.
    7. 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.
    8. Li Junjiang & Hou Lei & Zhang Jiarui, 2011. "Capital endowment, credit constraint and FDI: Analysis based on heterogeneous firms," Frontiers of Economics in China, Springer;Higher Education Press, pages 55-75.
    9. Kamran Bilir & Davin Chor & Kalina Manova, 2014. "Host-Country Financial Development and Multinational Activity," NBER Working Papers 20046, National Bureau of Economic Research, Inc.
    10. Michał Brzozowski, 2013. "Gender Equality as the Determinant of FDI Flows to Central European Countries," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw.
    11. Joachim Wagner, 2014. "Credit constraints and exports: a survey of empirical studies using firm-level data," Industrial and Corporate Change, Oxford University Press, pages 1477-1492.
    12. C. Fritz Foley & Kalina Manova, 2015. "International Trade, Multinational Activity, and Corporate Finance," Annual Review of Economics, Annual Reviews, pages 119-146.
    13. Charlie Karlsson, 2015. "My urban idol 2050 - the city of Gothenburg," International Journal of Global Environmental Issues, Inderscience Enterprises Ltd, vol. 14(1/2), pages 17-39.
    14. Joachim Wagner & John P. Weche Gelübcke, 2015. "Access to finance, foreign ownership and foreign takeovers in Germany," Applied Economics, Taylor & Francis Journals, vol. 47(29), pages 3092-3112, June.
    15. ZHANG, Jiarui & HOU, Lei, 2014. "Financial structure, productivity, and risk of foreign direct investment," Journal of Comparative Economics, Elsevier, pages 652-669.
    16. Joachim Wagner, 2014. "Credit constraints and exports: a survey of empirical studies using firm-level data," Industrial and Corporate Change, Oxford University Press, pages 1477-1492.

    More about this item

    Keywords

    multinational firms; heterogeneity; productivity; financial constraints;

    JEL classification:

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

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