FDI inflow and financial costs of local firms

Abstract

This study investigates the impact of foreign direct investment (FDI) inflow on the financial costs of local firms. We develop a simple theoretical model for the banking market to illustrate the decrease in financial costs after FDI inflow. The model’s predictions are then verified by analyzing bank lending data of six cities in an Eastern Chinese province for the period 2010–2015. Our results show that (1) the financial costs of FDI recipients and local firms decline with FDI inflow; (2) among local firms, private-owned firms and micro-, small- and medium-sized enterprises experience a greater drop in financial costs than state-owned firms and (3) Cost of liquid loans (short- and mid-term loans) decreases more than that of long-term loans.

Keywords:

• FDI inflow
• financial cost
• heterogeneity

JEL Classification:

• G21
• F23

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Working capital loans are a type of loan granted to meet short-term financing demand and to guarantee the normal operation of firms.

Additional information

Funding

This work is supported by the National Natural Science Foundation of China under the grant no. 71903160, the 111 project under the grant no. B16040, the Fundamental Research Funds for the Central Universities under the grant no. 20720171067, and Overseas Expertise Introduction Project for Discipline Innovation.

Notes on contributors

Yu Wu

Yu Wu is an associate professor at Southwestern University of Finance and Economics. His research interests include public, development and financial economics. His work has been published in refereed journals, including Journal of the Asia Pacific Economy, Emerging Market Finance & Trade.

Xiao Li

Xiao Li is a Ph.D. candidate at the Southwestern University of Finance and Economics. Her research interests include inclusive financial development and banking.

Yan Zhang

Yan Zhang is a specially-appointed professor at Chongqing Technology and Business University . Her research interests include banking and finance, capital markets, urban economics, and international economics. Her work has been published in books and refereed journals, including China Economic Review, Applied Economics, Finance Research Letters, Singapore Economic Review, and Economics Bulletin.

Kai Li

Kai Li is an assistant professor at Xiamen University. His research interest includes International Trade and Industrial Organization.