SMEs, FDI and Financial Constraints

This paper aims at exploring the problems experienced by SMEs with international ambitions in gaining access to debt and equity finance for foreign direct investment (FDI) projects. We develop several hypotheses why such SMEs are expected to face severe financing constraints for foreign investments and provide an explorative empirical analysis of these issues for a sample of 32 Belgian SMEs. The market of FDI finance for SMEs is found to be subject to considerable capital market imperfections. The information problems and lack of collateral that often characterize international investment, the home bias of financiers and the capital gearing method used by banks to evaluate SMEs' foreign projects give rise to financial constraints. The FDI finance gap hinders small firms in their internationalization strategy and negatively affects their economic performance