Global Capital Flows and Financing Constraints

Firms often cite financing constraints as one of their primary obstacles to investment. Global capital flows, by bringing in scarce capital, may ease the financing constraints of host country firms. But if incoming foreign investors borrow heavily...

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Bibliographic Details
Main Authors:	Harrison, Ann E., Love, Inessa, McMillan, Margaret S.
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2013
Subjects:	ASSETS ASYMMETRIC INFORMATION BALANCE OF PAYMENTS BANK LOANS CAPITAL ACCUMULATION CAPITAL ALLOCATION CAPITAL FLOWS CAPITAL MARKETS CAPITALIZATION CASH EQUIVALENTS CLOSED ECONOMIES COMMERCIAL BANK LOANS COMPETITIVENESS CREDIT RATIONING CROWDING OUT DEBT DEPOSITS DEVELOPMENT ECONOMICS DIRECT INVESTMENT DISCOUNTED VALUE DIVIDENDS DOMESTIC CAPITAL MARKETS DOMESTIC INVESTMENT EMPIRICAL EVIDENCE EQUITY CAPITAL EXCHANGE RATE EXPORTS EXTERNAL FINANCING FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIARIES FIXED CAPITAL FOREIGN ASSETS FOREIGN CURRENCY FOREIGN DIRECT INVESTMENT FOREIGN FIRMS FOREIGN INVESTMENT FOREIGN INVESTORS FOREIGN OWNERSHIP GDP GLOBAL CAPITAL GNP GNP PER CAPITA GROSS DOMESTIC PRODUCT GROWTH RATE IMPORTS INCOME INCOME LEVELS INTEREST RATE INTEREST RATES LESS DEVELOPED COUNTRIES LIQUID ASSETS LIQUIDITY M2 M3 MARGINAL COST MARGINAL PRODUCT MARKETABLE SECURITIES MERGERS NPV OPTIMIZATION PERFECT COMPETITION POLICY MAKERS PORTFOLIO PRESENT VALUE PRODUCTION FUNCTION PRODUCTIVITY PROFIT MAXIMIZATION RATIONAL EXPECTATIONS REAL GDP REAL GNP SAVINGS SCARCE CAPITAL SECURITIES SURCHARGES VALUATION VARIABLE COSTS WORKING CAPITAL GLOBAL CAPITAL FOREIGN DIRECT INVESTMENTS TIME-SERIES ANALYSIS CROSS COUNTRY ANALYSIS CAPITAL INFLOWS CAPITAL ACCOUNT MULTINATIONAL ENTERPRISES PORTFOLIO INVESTMENT CASH FLOW GLOBALIZATION
Online Access:	http://documents.worldbank.org/curated/en/2002/02/1715999/global-capital-flows-financing-constraints http://hdl.handle.net/10986/15615

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Summary:	Firms often cite financing constraints as one of their primary obstacles to investment. Global capital flows, by bringing in scarce capital, may ease the financing constraints of host country firms. But if incoming foreign investors borrow heavily from domestic banks, foreign direct investment may exacerbate financing constraints by crowding host country firms out of domestic capital markets. Combining a unique cross-country firm-level panel with time-series data on restrictions on international transactions and capital flows, Harrison, Love, and McMillan find that different measures of global flows are associated with a reduction in firm-level financing constraints. First, the authors show that one type of capital inflow-foreign direct investment-is associated with a reduction in financing constraints. Second, they test whether restrictions on international transactions affects the financing constraints of firms. The results suggest that only one type of restriction-those on capital account transactions-negatively affects firms' financing constraints. The authors also show that multinational firms are not financially constrained and do not appear to be sensitive to the level of foreign direct investment. This implies that foreign direct investment eases financing constraints for non-multinational firms. Finally, the authors show that (1) foreign direct investment only eases financing constraints in the non-G7 countries, and (2) other kinds of flows, such as portfolio investment, have no impact on financing constraints.

Global Capital Flows and Financing Constraints

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