SMEs, foreign direct investment and financial constraints: The case of Belgium

Abstract

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 for why such small businesses are expected to face severe financing constraints for foreign investments and provide an explorative empirical study with both the demand and supply side of FDI finance. We have interviewed thirty-two Belgian SMEs that carry out FDI, five banks and five venture capitalists. Based on the SME discussions, we have composed a questionnaire that was sent to the interviewed SMEs. 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 small firms’ foreign projects give rise to financial constraints for SMEs’ FDI projects. The reported finance gap hinders small firms’ (international) development and leads to suboptimal home and FDI host country development.