Foreign direct investment spillovers and firms’ access to credit

Abstract

Using a unique data set from the Czech Republic for 1994–2003, this study examines the relationship between technological spillovers from foreign direct investment (FDI) and firms’ access to external finance. The empirical analysis indicates that overall, Czech firms benefit little from technological spillovers from FDI. However, a closer look at the financing of domestic firms suggests that firms that have access to external finance enjoy larger benefits from the presence of foreign firms in their own industry or in downstream industries, through increased productivity. The results highlight the importance of financial-sector development and access to external financing to increasing the productivity and competitiveness of domestic firms through technological spillovers from FDI. Our finding suggests that well-developed financial markets may be needed in order to take full advantage of the benefits associated with FDI inflows.

Keywords:

• FDI
• spillovers
• access to finance

JEL Classification:

• F21

Notes

¹ Access to external credit refers to credit external to the firm, not necessarily to the home country of the firm.

² The Haussman–Wu test suggests that fixed effects regressions are appropriate in this context.

³ Other papers on FDI used lags of explanatory variables in order to address potential endogeneity in estimation (Kim and Park, 2013).

⁴ Girma et al. (2008) use similar measures for access to credit, captured by the ability of firms to obtain outside loans.

⁵ Domestic firms are defined as those with 0% foreign equity.