Financial Constraints and the Margins of FDI

Buch, Claudia M. and Kesternich, Iris and Lipponer, Alexander and Schnitzer, Monika (2009): Financial Constraints and the Margins of FDI. Discussion Papers in Economics 2009-17

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 im-pact 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.

• Item Type: Paper (Discussion Paper)
• Status: Submitted Version
• Keywords: multinational firms, heterogeneity, productivity, financial constraints
• Collections: Economics; Economics > Discussion Papers in Economics; Economics > Discussion Papers in Economics > International Trade
• Subjects: 300 Social sciences > 300 Social sciences, sociology and anthropology; 300 Social sciences > 330 Economics
• JEL Classification: F2, G2
• Language: English