TY - JOUR AU - Harrison,Ann E. AU - Love,Inessa AU - McMillan,Margaret S. TI - Global Capital Flows and Financing Constraints JF - National Bureau of Economic Research Working Paper Series VL - No. 8887 PY - 2002 Y2 - April 2002 UR - http://www.nber.org/papers/w8887 L1 - http://www.nber.org/papers/w8887.pdf N1 - Author contact info: Ann Harrison The Wharton School University of Pennsylvania 2016 Steinberg Hall-Dietrich Hall 3620 Locust Walk Philadelphia, PA 19104-6370 Tel: 215 746 3132 E-Mail: annh@wharton.upenn.edu Inessa Love The World Bank 1818 H Street, NW Washington, DC 20433 Tel: 202/477-1234 Fax: 202/477-6391 E-Mail: Ilove@worldbank.org Margaret S. McMillan Tufts University Department of Economics 114a Braker Hall Medford, MA 02155 Tel: 617/627-3137 Fax: 617/627-3197 E-Mail: margaret.mcmillan@tufts.edu AB - 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. ER -