Real versus Financial Barriers to Multinational Activity

Recent literature on multinational firms has stressed the importance of low productivity as a barrier to the cross-border expansion of firms. However, firms typically also need external finance to finance the costs of market entry. In addition to productivity-related real barriers, financial constraints may thus restrict market entry. Building on a model of multinational firms facing real and financial barriers to exporting and FDI, we provide empirical evidence on the importance of these barriers. We find that, in addition to productivity, financial factors at the affiliate and at the parent level affect firms’ foreign activities, both along the intensive and the extensive margin.