Global Capital Flows and Financing Constraints

48 Pages Posted: 11 Apr 2002 Last revised: 15 Apr 2022

See all articles by Ann E. Harrison

Ann E. Harrison

University of California, Berkeley; National Bureau of Economic Research (NBER)

Margaret McMillan

Tufts University - Department of Economics; International Food Policy Research Institute (IFPRI); National Bureau of Economic Research (NBER)

Inessa Love

World Bank - Development Economics Data Group (DECDG)

Date Written: April 2002

Abstract

Firms often cite financing constraints as one of their primary obstacles to investment. Global capital flows, by bringing in scarce capital, may ease host-country firms' financing constraints. However, if incoming foreign investors borrow heavily from domestic basnks, direct foreign investment (DFI) may exacerbate financing constraints by crowding host country firms out of domestic capital markets. Combininb a unique cross-country firm-level panel with time-series data on restrictions on international transactions and capital flows, we find that different measures of global flows are associated with a reduction in firm-level financing constraints. First, we show that one type of capital inflow--DFI--is associated with a reduction in financing constraints. Second, we test whether restrictions on international transactions affect firms' financing constraints. Our results suggest that only one type of restriction--those on capital account transactions--negatively affect firms' financing constraints. We also show that multinational firms are not financially constrained and do not appear to be sensitive to the level of DFI. This implies that DFI eases financing constraints for non-multinational firms. Finally, we show that DFI only eases financing constraints in the non-G7 countries.

Suggested Citation

Harrison, Ann E. and McMillan, Margaret and Love, Inessa, Global Capital Flows and Financing Constraints (April 2002). NBER Working Paper No. w8887, Available at SSRN: https://ssrn.com/abstract=307124

Ann E. Harrison (Contact Author)

University of California, Berkeley ( email )

Giannini Hall
Berkeley, CA 94720-3880
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Margaret McMillan

Tufts University - Department of Economics ( email )

Medford, MA 02155
United States

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Inessa Love

World Bank - Development Economics Data Group (DECDG) ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/ilove

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