FDI and Credit Constraints: Firm Level Evidence in China

40 Pages Posted: 26 Feb 2007

See all articles by Jérôme Héricourt

Jérôme Héricourt

LEM-CNRS (UMR 9221)

Sandra Poncet

Université Paris I Panthéon-Sorbonne - TEAM; Université Paris I Panthéon-Sorbonne; Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Date Written: February 2007

Abstract

In this paper, we analyze whether incoming foreign investment in China plays an important role in alleviating domestic firms' credit constraints. Access to external finance is a crucial determinant of business expansion. Using firm-level data on 2,200 domestic companies for the period 1999-2002, we investigate the extent to which firms are financially constrained and whether direct foreign investment relaxes financing constraints of firms. When we split domestic firms into public and private firms, we find that public firms' investment decisions are not sensitive to debt ratios or the cost of debt. Nor is there any evidence that public firms are affected by foreign firms presence. We interpret this as evidence in support of the notion of a soft budget constraint for public firms. In contrast, private domestic firms appear more credit constrained than state-owned or foreign firms but their financing constraints tend to ease in a context of abundant foreign investment.

Keywords: Financial constraint, Corporate finance, Foreign Direct Investment

JEL Classification: E22, E44, G31, O16

Suggested Citation

Hericourt, Jerome and Poncet, Sandra and Poncet, Sandra, FDI and Credit Constraints: Firm Level Evidence in China (February 2007). Available at SSRN: https://ssrn.com/abstract=965375 or http://dx.doi.org/10.2139/ssrn.965375

Jerome Hericourt (Contact Author)

LEM-CNRS (UMR 9221) ( email )

Université Lille 1 Sciences et Technologies
Faculté des Sciences Economiques et Sociales
Villeneuve d'Ascq, 59655
France

Sandra Poncet

Université Paris I Panthéon-Sorbonne - TEAM ( email )

106-112 boulevard de l'hôpital
Cedex 13 Paris, P75647
France

HOME PAGE: http://team.univ-paris1.fr/teamperso/sponcet/

Université Paris I Panthéon-Sorbonne ( email )

12, place du Panthéon
Paris, IL
France

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

9 Rue Georges Pitard
Paris Cedex 15, F-75015
France

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