The Effect of the Interest Rate on the Investment Expenditures of Mexican Manufacturing Firms

The behavior of investment by Mexican manufacturing firms is analyzed for the period 1994-1999. Investment equations are estimated focusing on the relevance of financial constraints. The main findings are that internal funds play a relevant role in explaining investment expenditures by firms. As is customary in tests of the effects of capital market imperfections on investment, the sample is split depending on the importance of financial constraints for firms. We find that internal funds are less important for the subset of firms less likely to be financially constrained. Moreover, a statistically significant interest rate effect on investment is found for the whole sample when a measure of the foreign interest rate is used as a proxy for the cost of capital. Finally, there is some evidence that the interest rate effect is especially important for firms that are deemed a priority to be less financially constrained.