FDI and firm productivity in host countries: The role of financial constraints

Wontae Han, Jian Wang and Xiao Wang

Journal of International Money and Finance, 2022, vol. 124, issue C

Abstract: This paper studies the effect of FDI firms’ financial advantages on firm productivity in host countries and examines the related policy implications. If FDI firms face lower financing costs but have higher fixed production costs than local firms, a simple Melitz-type model predicts that FDI firms could have even lower cutoff productivity than local firms, especially in financially vulnerable sectors. The same mechanism will also lower the average productivity of FDI firms especially in financially vulnerable sectors, although FDI firms on average are still more productive than local firms. These predictions are supported by the Chinese firm-level data. Then, we study policy implications in a two-country model that resembles these empirical patterns. The counterfactual policy analysis shows that offering tax benefits to FDI firms could be counterproductive because it attracts FDI firms that are even less productive than local firms. The policy in the host country to improve its financial market efficiency could also hurt the country’s welfare because of the interaction between financial market reforms and the distortionary taxes imposed on local firms to finance FDI subsidies.

Keywords: Foreign direct investment; Financial constraints; Firm productivity; China (search for similar items in EconPapers)
JEL-codes: F15 F21 F23 F36 F60 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560622000262
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:124:y:2022:i:c:s0261560622000262

DOI: 10.1016/j.jimonfin.2022.102623

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().