Partial ownership, financial constraint, and FDI

Using matched firm-bank-FDI data over the period 1989–2016, this study explores how a firm's financial constraints affect its choice of foreign affiliate ownership structure. Importantly, it tests the hypothesis that parent firms with banks as their largest shareholders hold lower ownership shares in their foreign subsidiaries, in part due to typical bank risk-averse behavior. The empirical analysis confirms that foreign subsidiary ownership ratios are negatively associated with parent firms’ debt ratios. Moreover, this study finds evidence that greater bank ownership of the investing parent leads to lower foreign affiliate ownership shares. However, this result is not robust to two specifications: "crisis times" when bank lending is greatly restricted to all borrowers, and a follow-the-customer relationship where the bank already has an overseas subsidiary in the host country.