Global Capital Flows and Financing Constraints
By Ann E. Harrison, Inessa Love, Margaret S. McMillan. 2002
431 citations recorded by the source corpus.
Firms often cite financing constraints as one of their primary obstacles to investment. Global capital flows, by bringing in scarce capital, may ease the financing constraints of host country firms. But if incoming foreign investors borrow heavily from domestic banks, foreign direct investment may exacerbate financing constraints by crowding host country firms out of domestic capital markets. Combining a unique cross-country firm-level panel with time-series data on restrictions on international transactions and capital flows, Harrison, Love, and McMillan find that different measures of global flows are associated with a reduction in firm-level financing constraints. First, the authors show that one type of capital inflow-foreign direct investment-is associated with a reduction in financing constraints. Second, they test whether restrictions on international transactions affects the financing constraints of firms. The results suggest that only one type of restriction-those on capital account transactions-negatively affects firms' financing constraints. The authors also show that multinational firms are not financially constrained and do not appear to be sensitive to the level of foreign direct investment. This implies that foreign direct investment eases financing constraints for non-multinational firms. Finally, the authors show that (1) foreign direct investment only eases financing constraints in the non-G7 countries, and (2) other kinds of flows, such as portfolio investment, have no impact on financing constraints.
Subfields: Finance
View Paper: https://www.semanticscholar.org/paper/5bb0a1029e3f6b0deb0a4a3f9c61ce17a7813025
How researchers see this paper
The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.
In Finance
- Laura Alfaro
- Zuzana Irsova
- C. Fritz Foley
- Sebnem Kalemli‐ozcan
- Jérôme Héricourt
- S. Poncet
- M. Chen
- Kalina B. Manova
Citations in the corpus
- Financial Constraints in China: Firm-Level Evidence (2010, positive): “In the literature, non linearity in financial constraints is more often apprehended using the quadratic term of the lagged dependent variable in parallel to the lagged dependent variable (Harrison et al., 2004; Hubbard, 1998).”
- Selection and Market Reallocation: Productivity Gains from Multinational Production (2012, methodology): “Given the estimates of equations (28)-(31), we can now obtain estimates of P ln (P 0=P ), c ln (c0=c), ln and ".”
- Trade, Foreign Investment, and Industrial Policy for Developing Countries* (2009, background): “An interesting way to think about diversi cation is via what Hausmann and Rodrik (2003) call "self-discovery.”
- International Trade, Multinational Activity, and Corporate Finance (2015, positive): “Harrison et al. (2004) use an estimation specification derived from an Euler equation to consider if, by bringing in scarce capital, FDI relaxes local financing constraints.”
- The impact of capital flows on domestic investment in transition economies (2008, background): “Gruben and McLeod (1998) first test empirically the relationship between growth and”
- FDI and Credit Constraints: Firm Level Evidence in China (2009, methodology): “Our paper is closely related to work by Harrison and McMillan (2003)6 and Harrison et al. (2004),7 who analyze the relationship between financial development and financing constraints by estimating Euler equations using micro-data.”