Global Capital Flows and Financing Constraints

Ann E. Harrison, Inessa Love, Margaret S. McMillan

NBER Working Paper No. 8887
Issued in April 2002
NBER Program(s):International Trade and Investment

Firms often cite financing constraints as one of their primary obstacles to investment. Global capital flows, by bringing in scarce capital, may ease host-country firms' financing constraints. However, if incoming foreign investors borrow heavily from domestic basnks, direct foreign investment (DFI) may exacerbate financing constraints by crowding host country firms out of domestic capital markets. Combininb a unique cross-country firm-level panel with time-series data on restrictions on international transactions and capital flows, we find that different measures of global flows are associated with a reduction in firm-level financing constraints. First, we show that one type of capital inflow--DFI--is associated with a reduction in financing constraints. Second, we test whether restrictions on international transactions affect firms' financing constraints. Our results suggest that only one type of restriction--those on capital account transactions--negatively affect firms' financing constraints. We also show that multinational firms are not financially constrained and do not appear to be sensitive to the level of DFI. This implies that DFI eases financing constraints for non-multinational firms. Finally, we show that DFI only eases financing constraints in the non-G7 countries.

download in pdf format
   (238 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w8887

Published: Harrison, Ann E., Inessa Love and Margaret S. McMillan. "Global Capital Flows And Financing Constraints," Journal of Development Economics, 2004, v75(1,Oct), 269-301. citation courtesy of

Users who downloaded this paper also downloaded* these:
Harrison and McMillan w8438 Does Direct Foreign Investment Affect Domestic Firms' Credit Constraints?
Hall w8773 The Financing of Research and Development
Kerr and Nanda w15498 Financing Constraints and Entrepreneurship
Fazzari, Hubbard, and Petersen w2387 Financing Constraints and Corporate Investment
Kaplan and Zingales w5267 Do Financing Constraints Explain Why Investment is Correlated with Cash Flow?
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us