Financial Constraints and the Margins of FDI

42 Pages Posted: 7 Oct 2009

See all articles by Claudia M. Buch

Claudia M. Buch

Deutsche Bundesbank

Iris Kesternich

KU Leuven - Department of Economics; Ludwig Maximilian University of Munich (LMU) - Faculty of Economics

Alexander Lipponer

Deutsche Bundesbank

Monika Schnitzer

University of Munich - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2009

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: financial constraints, heterogeneity, multinational firms, productivity

JEL Classification: F2, G2

Suggested Citation

Buch, Claudia M. and Kesternich, Iris and Lipponer, Alexander and Schnitzer, Monika, Financial Constraints and the Margins of FDI (September 2009). CEPR Discussion Paper No. DP7444. Available at SSRN: https://ssrn.com/abstract=1484477

Claudia M. Buch

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Iris Kesternich

KU Leuven - Department of Economics ( email )

Leuven, B-3000
Belgium

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

Alexander Lipponer

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

Monika Schnitzer (Contact Author)

University of Munich - Department of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany
+49 89 2180 2217 (Phone)
+49 89 2180 2767 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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