Finance Constraint and Firm Investment: A Survey of Econometric Methodology

Abstract

It is well established in the macro-finance literature that finance is a crucial factor in the growth process via capital formation, hence the importance of finance constraint in the theory of investment. The issue is particularly important in the emerging market economies which are considered as southern engines of global growth. A very large empirical literature has emerged to test the hypothesis of finance constrained investment since the publication of the seminal paper of Fazzari, Hubbard and Petersen in 1988. The present paper is a survey of the literature. The paper in particular covers the studies on India which as one of the emerging market economies has recently attained its crucial importance for global growth. The paper also provides new research methodology to fill the lacunae in the existing literature.