| Abstract: |
In this paper, we assess the success of the ongoing financial system reforms
in China through the investigation of the extent to which firms are
financially constrained. We focus on the part played by Foreign Direct
Investment (FDI) in funding Chinese corporate sector as we analyze whether
incoming foreign investment in China plays an important role in alleviating
domestic firms’ credit constraints. Using firm-level data on 2,200 domestic
companies for the period 1999-2002 and splitting domestic firms into public
and private firms, we find that public firms’ investment decisions are not
sensitive to debt ratios or the cost of debt. Nor is there any evidence that
public firms are affected by foreign firms presence. We interpret this as
evidence in support of the notion of a soft budget constraint for public
firms. In contrast, private domestic firms appear more credit constrained than
state-owned firms but their financing constraints tend to ease in a context of
abundant foreign investment. Our results confirm that the development of
cross-border relationships with foreign firms helps private domestic firms to
bypass both the financial and legal obstacles that they face at home(Huang,
2003). |