Productivity, financial constraints and outward foreign direct investment: Firm-level evidence

• Published in: China economic review Vol. 47; pp. 47 - 64
• Main Authors: Yan, Bing, Zhang, Yu, Shen, Yanzhi, Han, Jian
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.02.2018
• Subjects: Financial constraints; Outward foreign direct investment; Productivity; Productivity; Financial constraints; F21; F23; Outward foreign direct investment; G32
• ISSN: 1043-951X; 1873-7781
• DOI: 10.1016/j.chieco.2017.12.006

This paper studies the relationship between the financial constraints and outward foreign direct investment (OFDI) of Chinese enterprises. First, we construct a theoretical model and develop a series of hypotheses to analyze how productivity and financial constraints influence firms' OFDI decisions. Then we construct a multivariate index to measure internal and external financial constraints. Using Chinese Industrial Enterprises Database as well as the Database of OFDI Firms in China, our empirical finds that both productivity and financial constraints have important impacts on firms' OFDI decisions. In addition, the marginal effect of the financial constraints increases as firms' productivity rises; an effect felt more to the private enterprises than state-owned enterprises. Empirical results also indicate that external financial constraints affect the firms' OFDI decisions more greatly than the internal financial constraints. •We build a theoretical model to analyze how productivity and financial constraints affect the firms’ decision to make OFDI.•Both productivity and financial constraints are important factors affecting firms’ ability to make OFDI.•The marginal impact of the financial constraints on OFDI increases with the firms’ rising productivity.•Compared with the state-owned enterprises, the private enterprises are more likely to be affected by the financial constraints in their OFDI efforts.