The impact of foreign presence on domestic firms' capital structure

An important consequence of globalization in recent years has been the incessant rise in Foreign Direct Investment (FDI) on global scale (Haskel et al., 2007). According to the UNCTAD (ibid), policy promotion of FDI is nowadays common both in developing and in developed countries, as well as both in the manufacture and the service industry. On one hand, international business researchers, indeed, demonstrate that foreign presence can positively affect the output of domestic firms, which then justifies why governments worldwide struggle to attract foreign investors (Görg & Greenaway, 2004). The impact of foreign presence can be direct, that is the effect of foreign ownership on domestic firms (see Harris & Robinson, 2002; Girma & Görg, 2007; Arnold & Javorcik, 2009), as well as indirect, namely the FDI spill-overs (e.g., Aitken & Harrison, 1999, Haskel et al., 2007, Keller & Yeaple, 2009). The latter depict the unavoidable consequences of foreign presence on the productivity, competition and profitability of domestic firms. On the other hand, finance scholars suggest that the characteristics of the output market (i.e. profitability or growth opportunities) are important determinants of firms’ capital structure (see Titman, 1984; Brander & Lewis, 1986; Maksimovic, 1988). In light of this, my thesis goes a step further by linking these two strands of research, stating that foreign presence can also influence domestic firms’ capital structure. This study, in fact, aims at deepening Anwar and Sun’s (2015) pioneer work, which first had this intuition. Specifically, as foreign inward investments affect domestic firms’ output, which in turn influences corporate financial decisions, it’s possible to argue that the foreign presence in a country, through its related spill-over effects, can also affect domestic firms’ capital structure (Anwar & Sun, 2015). However, this thesis isn’t limited to a study recap rather a two-fold contribution. On one side, it enriches the theoretical background behind the assumption made by Anwar and Sun (ibid). On the other side, it investigates whether and to what extent this relationship holds in the reality. On the basis of a simple theoretical model, empirical research has been carried out. According to this, I studied panel data of medium-large sized Italian firms in the manufacture and in the service industry, for the period 2006-2014. Moreover, as the effect of financial decisions can vary across industries, both manufacturing and service firms have been further divided into smaller subgroups, according to both their level of attractiveness of FDI and the specific activity carried out. To the best of my knowledge, this study is the first study considering the impact of foreign presence on Italian firms’ capital structure. In fact, even though many studies about capital structure have already been carried out, they all focus on other determinants, as ownership nature or firm lifecycle (see Gottardo & Moisello, 2014; La Rocca et al., 2009). Interestingly, the empirical results suggest that the presence of foreign firms in Italy negatively affect domestic firms’ leverage in manufacturing, while in the service industry it has a positive effect. In other words, as the theoretical model anyway reports a positive effect of foreign presence on both debt and total investment, in the manufacture foreign presence increases firms’ total investment more than it increases their debt, while the opposite happens in the service industry.