Financial Constraints and the Margins of FDI

Claudia Buch, Iris Kesternich, Alexander Lipponer () and Monika Schnitzer ()
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Claudia Buch: University of Tübingen
Iris Kesternich: University of Munich

No 272, Discussion Papers from SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

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.

Keywords: multinational firms; heterogeneity; productivity; financial constraints (search for similar items in EconPapers)
JEL-codes: F2 G2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pke
Date: 2009-09
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Related works:
Working Paper: Financial Constraints and the Margins of FDI (2009)
Working Paper: Financial constraints and the margins of FDI (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:trf:wpaper:272

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