Does the Presence of Foreign Firms Reduce Domestic Firms’ Financial Constraints in Sub-Saharan Africa?†

Abstract

Abstract Firms in the SSAs (sub-Saharan African countries for short) face severe financial constraints. Because financial markets in the SSAs are underdeveloped, policymakers have sought after the establishment of foreign-owned firms in their countries to help, among others, alleviate the financial constraints faced by domestic firms. However, there is no empirical evidence that speaks to the association between foreign firm presence and domestic firms’ financial constraint. Using firm-level data spanning across 36 SSAs from the World Bank Enterprise Survey, we show that the increase in foreign firm presence can ease the financial constraints of domestic firms in the SSAs. One reason is that foreign-owned firms are not only less financially constrained, they are also less likely to apply for bank loans. Therefore, an increase in foreign firm presence may reduce the competition for loans and ease the financial constraints of domestic firms by improving their borrowing success.