Essays on Foreign Direct Investment and Development Economics

Abstract

This thesis consists of three empirical essays on Foreign Direct Investment (FDI) and Small Medium Enterprise (SME) access to finance. The first essay examines determinants of Chinese Outward Direct Investment (ODI) in infrastructure sectors. This study focuses on the role of host country institutions, macroeconomic stability and geography on attracting Chinese ODI. Utilizing micro-level project data over the years 2005 to 2016, results show that Chinese infrastructure investments are attracted to countries with a limited fiscal space but strong institutions. We also find that geographic distance, cultural proximity, Free Trade Agreement with China, country size are important factors in attracting Chinese investments. The second essay studies SME access to finance in Asia. We investigate the relative importance of external finance vis-à-vis internal finance for SME and larger firms and examine how SME characteristics associated with the extent of their bank borrowing. Results indicate that bank borrowing and line of credit availability are positively associated with financial audit, managerial experience, export participation, and ISO certificate, while it is negatively associated with foreign ownership and SME status. Our research suggests that access to finance is an important concern in Asia and government intervention targeting improvement in credit guarantee systems, monitoring and credit scoring can help easing the constraints for SME access to external finance. Finally, the third essay examines the role of infrastructure investment deals as a signaling on attracting FDI. Intriguingly, we find that infrastructure deals produce a negative signal to MNEs’ decision making for developing countries. We look for several channels in which the negative signaling effect can pass through. Findings suggest that increase in global risk aversion stemming from global financial crisis and country specific risk level are the main factors behind the negative signalling effect.