Financial constraint and foreign direct investment of SMEs: evidence from Portugal

Abstract

This work aims to explore the financing constraints perceived by Portuguese small and medium-sized enterprises (SMEs) carrying out productive foreign direct investment (FDI). It relies on primary data, presenting an explorative empirical analysis. The results evidence a strong dependence on internal funds and give little support to market failures in financing FDI, as no remarkable differences were found in financing constraints between domestic and foreign investments, but this reluctance of Portuguese SMEs towards external financing does not match with a willingness to open the social capital to new shareholders. Portuguese entrepreneurs lack knowledge of alternative financing sources to relieve dependence on domestic funds to FDI. Banks and government could relevantly contribute in this field, we also recommend further financial literacy in Portguese SMEs. This work is limited by its sample and qualitative nature. Although there is abundant literature on the access to economic agents' financing, to this day this work is the first to focus on Portuguese SMEs analysing primary data, hence its originality. Reporting SMEs’ reluctance towards external financing, it can enhance external financers to best capture such clients.