From local banks to global markets: how financial institutions propel private firms’ OFDI expansion

This study develops a theoretical framework in which private firms access foreign markets either through exports or outward foreign direct investment (OFDI) under credit constraints and information frictions. The model demonstrates that local financial institutions facilitate OFDI through two complementary channels: a financing channel – requiring simultaneous reductions in financing costs and increases in financing ratios – and an information channel that provides firms with overseas market information and risk-management services. Leveraging the establishment of new city commercial banks (CCBs) and their branches in China as an exogenous shock, we identify the causal impact of local financial development on private firms’ OFDI decisions. The empirical evidence shows that local financial institutions significantly raise the probability of OFDI by easing credit constraints and supplying information critical for firms’ international operations. Moreover, they enable private firms to enter a broader range of foreign destinations, including markets that are more difficult to access. The magnitude of these effects varies systematically with host-country characteristics and firm heterogeneity.