Foreign-Owned Firms and Financial Constraints: [Evidence from Ghana]

The ability of foreign firms to bring in additional capital to a host country together with technological and skill spillovers may relieve domestic firms of their financial constraints. Yet, some foreign firms borrow more from the local capital markets than the amount of capital they bring in, worsening the financial constraints of the domestic firms. We use a panel of 182 Ghanaian manufacturing firms over the period 1991-1997 to examine whether, local firms in Ghana face more financial constraints than foreign firms, and whether, foreign firms’ borrowing on the local financial markets relieves or worsens domestic firms’ financial constraints. We estimate an Euler equation augmented with a financial variable and interpret the degree of responsiveness of investment to the financial variable as the degree of financial constraints faced by firms. We find that small and domestic firms are more financially constrained than large and foreign firms and that; domestic firms’ financial constraints are exacerbated by foreign firms’ borrowing from the local capital markets.