Source: are.berkeley.edu
Topic: Investment Firm
Sort Desciption: imperfections and firm level investment in developing countries ..... to future investment. Firms that are financially distressed are more likely to be up ...
Content Inside: 1 Does direct foreign investment affect domestic firms credit constraints? ∗ Ann E. Harrison â™ Margaret S. McMillan ♣ University of California, Berkeley and Tufts University National Bureau of Economic Research January, 2002 Abstract: Firms in developing countries cite credit constraints as one of their primary obstacles to investment. Direct foreign investment, by bringing in scarce capital, may ease domestic firms’ credit constraints. Alternatively, if foreign firms borrow heavily from domestic banks, they may crowd local firms out of domestic capital markets. One plausible mechanism by which this may happen is indirect. Foreign firms may be more experienced and have better financial ratios and thus, be a safer bet for lending institutions. Using firm-level data from the Ivory Coast for the period 1974-1987 we test the following hypotheses: (1) domestic firms are more credit constrained than foreign firms and (2) borrowing by foreign firms exacerbates the credit constraints of domestic firms. Results suggest that domestic firms are significantly more credit constrained than foreign firms and that borrowing by foreign firms aggravates domestic firms credit constraints. By splitting the sample into state-owned (SOE) and privately owned domestic enterprises we are able to show that SOEs are less financially constrained than other domestic enterprises, consistent with the notion of a “soft budget constraintâ€. Borrowing by foreign firms affects only privately owned enterprises. Finally, we explore possible explanations for the crowding out effect. ∗ Thanks to Eleanor Park for excellent research assistance. Thanks to Pierluigi Balduzzi for several helpful comments, and to Ray Fisman, Charlie Himmelberg, Glenn Hubbard, Ethan Ligon, Dan Richards, Dani Rodrik and Toni Whited for comments on an earlier draft. We would also like to thank seminar participants at Tufts, UC Davis, UC Berkeley, and Columbia University for helpful comments. â™ Depa ...
