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.