SMES, FDI and financial constraints

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