FDI and Credit Constraints: Firm-Level Evidence from China

Abstract

In this paper, we assess the success of the ongoing financial system reforms in China by investigating the extent to which firms are financially constrained. We focus on the role played by Foreign Direct Investment (FDI) in funding the Chinese corporate sector, and analyze whether incoming foreign investment in China plays an important role in alleviating domestic firms' credit constraints. Using firm-level data on 1,300 domestic companies over the period 2000-2002, we confirm that the development of cross-border relationships with foreign firms helps private domestic firms to bypass both the financial and legal obstacles that they face at home.

Keywords: Financial constraint, Corporate finance, Foreign Direct Investment, China

JEL Classification: E22, E44, G31, O16