Working Paper: CEPR ID: DP7444
Authors: Claudia M. Buch; Iris Kesternich; Alexander Lipponer; Monika Schnitzer
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 im-pact on the FDI decision (the extensive margin) and foreign affiliate sales (the intensive mar-gin). 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 Codes: F2; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial constraints at the parent level (G32) | Extensive margin of FDI (F23) |
| Financial constraints at the affiliate level (G32) | Intensive margin of FDI (F23) |
| Financial constraints at the affiliate level (G32) | Volume of sales of foreign affiliates (F23) |
| Productivity (O49) | Internationalization decisions of firms (F23) |
| Financial constraints (D10) | Internationalization decisions of firms (F23) |
| Financial constraints (D10) | Extensive margin of FDI (F23) |