Foreign Direct Investment and Financial Constraints: Firm-Level Evidence from Cambodia, Lao PDR, and Myanmar

Abstract

Financial constraints have been a significant obstacle to firms operating in developing countries. Prior studies show that foreign direct investment (FDI) helps to ease credit constraints for domestic firms. However, they only account for horizontal FDI spillovers. This paper therefore investigates both horizontal and vertical FDI spillovers using firm-level data from Cambodia, Lao PDR, and Myanmar (CLM). The key findings of this paper are threefold. First, FDI inflows lessen the financial constraints faced by local firms through partnership or joint venture. Second, an increasing share of FDI in horizontally and vertically related industries raises higher credit constraints for domestic firms. Third, the crowding-out effect of FDI is not uniform across domestic firms of different sizes. Therefore, policymakers should be aware of these possible negative spillovers and formulate policy to maintain FDI inflows while also ensuring the growth and survival of domestic firms.