Smes, Fdi and Capital Market Imperfections
SMEs, FDI and capital market imperfections
Wouter De Maeseneire∗ Erasmus University Rotterdam, The Netherlands PO Box 1738 3000 DR Rotterdam The Netherlands Tel: +31 10 408 15 07 Fax: +31 10 408 91 65 email: demaeseneire@few.eur.nl Tine Claeys Vlerick Leuven Gent Management School Reep 1 9000 Ghent Belgium Tel: +32 9 2109773 Fax: +32 9 2109751 Email: tine.claeys@vlerick.be
ABSTRACT This paper aims at exploring the problems experienced by SMEs in gaining access to debt and equity finance for FDI projects. We develop several hypotheses why SMEs are expected to face severe financing constraints for foreign investments and provide an empirical analysis of these issues for a sample of 33 Belgian SMEs. The market of FDI finance for SME is found to be subject to considerable capital market imperfections, which hinders small firms in their internationalization strategy and negatively affects their economic performance.
JEL classification codes: Keywords:
F21; F23; F34; G32; M13 small business financing; SMEs; FDI; internationalization; financing constraints
∗
Corresponding author.
1. Introduction
A remarkable and extremely important business phenomenon of the 20th century was the internationalization of large and small as well as established and new venture firms (Sapienza, Autio, George and Zahra, 2005). Next to the fact that young and small firms increasingly tend to internationalize, another novel element of the globalisation trend has been the impressive rise in foreign direct investment (FDI). Yet, it is widely acknowledged that small and medium-sized enterprises (SMEs), in general, are subject to substantial financing constraints.1 In this paper, we hypothesize that SMEs that invest in foreign countries will face even more severe finance constraints. We argue that many of the financing difficulties are similar in nature as those experienced by firms that try to finance R&D projects: volatile returns, asymmetric information and a lack of
Wouter De Maeseneire∗ Erasmus University Rotterdam, The Netherlands PO Box 1738 3000 DR Rotterdam The Netherlands Tel: +31 10 408 15 07 Fax: +31 10 408 91 65 email: demaeseneire@few.eur.nl Tine Claeys Vlerick Leuven Gent Management School Reep 1 9000 Ghent Belgium Tel: +32 9 2109773 Fax: +32 9 2109751 Email: tine.claeys@vlerick.be
ABSTRACT This paper aims at exploring the problems experienced by SMEs in gaining access to debt and equity finance for FDI projects. We develop several hypotheses why SMEs are expected to face severe financing constraints for foreign investments and provide an empirical analysis of these issues for a sample of 33 Belgian SMEs. The market of FDI finance for SME is found to be subject to considerable capital market imperfections, which hinders small firms in their internationalization strategy and negatively affects their economic performance.
JEL classification codes: Keywords:
F21; F23; F34; G32; M13 small business financing; SMEs; FDI; internationalization; financing constraints
∗
Corresponding author.
1. Introduction
A remarkable and extremely important business phenomenon of the 20th century was the internationalization of large and small as well as established and new venture firms (Sapienza, Autio, George and Zahra, 2005). Next to the fact that young and small firms increasingly tend to internationalize, another novel element of the globalisation trend has been the impressive rise in foreign direct investment (FDI). Yet, it is widely acknowledged that small and medium-sized enterprises (SMEs), in general, are subject to substantial financing constraints.1 In this paper, we hypothesize that SMEs that invest in foreign countries will face even more severe finance constraints. We argue that many of the financing difficulties are similar in nature as those experienced by firms that try to finance R&D projects: volatile returns, asymmetric information and a lack of
References: 47 HITT, M., HOSKISSON, R., KIM, H., 1997, International Diversification: Effects on Innovation and Firm-Performance in Product-Diversified Firms, Academy of