FDI, Trade Credit, and International Transmission of Liquidty Shocks: Evidence from Chinese Manufacturing Firms

Posted: 2 Feb 2016

See all articles by Shu Lin

Shu Lin

Department of Economics, The Chinese University of Hong Kong

Haichun Ye

Chinese University of Hong Kong, Shenzhen

Date Written: February 1, 2016

Abstract

We propose and empirically test a novel trade credit channel through which the presence of foreign-owned firms can propagate international liquidity shocks to a local country despite its tight controls over portfolio flows. A well-documented advantage of foreign-owned firms, especially large multinationals, in obtaining external financing is that they have access to global financial markets. Global liquidity shocks, therefore, can affect foreign-owned firms' trade credit provision to local downstream firms by influencing their cost of raising funds internationally. In a large sample of Chinese manufacturing firms over the period of 1998-2007, we find robust evidence supporting our hypothesis. We show that the difference between domestic and foreign-owned firms' provision of trade credit depends crucially upon global liquidity conditions.

Keywords: FDI, trade credit, international transmission of liquidity shocks, capital account openness, China

JEL Classification: F3, E4, F23, G15, G30

Suggested Citation

Lin, Shu and Ye, Haichun, FDI, Trade Credit, and International Transmission of Liquidty Shocks: Evidence from Chinese Manufacturing Firms (February 1, 2016). Available at SSRN: https://ssrn.com/abstract=2725786

Shu Lin (Contact Author)

Department of Economics, The Chinese University of Hong Kong ( email )

Department of Economics
The Chinese University of Hong Kong
Shatin, N.T., 200433
Hong Kong

Haichun Ye

Chinese University of Hong Kong, Shenzhen ( email )

2001 Longxiang Boulevard, Longgang District
Shenzhen, 518172

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