GEP 11/21: Credit Constraints and FDI Spillovers in China

Summary

We explore whether credit constraints faced by domestic firms affect FDI spillovers in China. We find that credit-constrained domestic firms have lower (even negative) FDI spillovers, with their reduction in the spillover effect being systematically greater at higher levels of external financial dependence.

Abstract

This paper provides firm-level evidence on the way in which credit constraints affect FDI spillovers. Using a panel of approximately 20,000 Chinese manufacturing firms over the period 2001-2005, we show that credit constrained domestic firms have lower (even negative) FDI spillovers, with their reduction in the spillover effect being systematically greater in sectors with higher levels of external financial dependence. Moreover, non-state domestic firms in financially dependent sectors have lower from FDI spillovers when compared to the state-owned domestic firms. We also show that domestic firms in sectors that are capital-intensive, highly tangible, and that manufacture durable and highly tradable goods benefit from larger FDI spillovers compared to firms in labour-intensive sectors. Our findings highlight the importance of credit constraints, host country financial institutions in determining the extent of FDI spillovers.

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Authors

Natasha Agarwal, Chris Milner and Alejandro Riaño

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