FDI, financial constraint and partial ownership

Author:

Ito Tadashi1ORCID,Ryan Michael2ORCID,Tanaka Ayumu345ORCID

Affiliation:

1. Faculty of International Social Sciences Gakushuin University Tokyo Japan

2. Department of Economics Western Michigan University Kalamazoo Michigan USA

3. College of Economics Aoyama Gakuin University Tokyo Japan

4. Research Institute of Economy, Trade and Industry (RIETI) Tokyo Japan

5. Project Center, Graduate School of Economics Kyoto University Kyoto Japan

Abstract

AbstractThis study uses matched firm‐bank‐FDI data from 1989 to 2016 to explore how a firm's financial constraints affect its foreign affiliate ownership structure choice. Importantly, it tests the hypothesis that parent firms with banks as their largest shareholders hold lower ownership shares in their foreign subsidiaries, in part due to typical bank risk‐averse behaviour. The empirical analysis confirms that foreign subsidiary ownership ratios are negatively associated with parent firms' debt ratios. Moreover, this study finds evidence that greater bank ownership of the investing parent leads to lower foreign affiliate ownership shares. However, this result is not robust to two specifications: ‘crisis times’ when bank lending is greatly restricted to all borrowers, and a follow‐the‐customer relationship where the bank already has an overseas subsidiary in the host country.

Funder

Zengin Foundation For Studies On Economics And Finance

Japan Society for the Promotion of Science

Publisher

Wiley

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