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Financing FDI into Developing Economies and the International Transmission of Business Cycle Fluctuations

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Author Info
Diemo Dietrich

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Abstract

We consider a financially constrained multinational corporation with investment projects in both an industrial and a developing country. Since the collateral values of the projects' tangible assets diverge, the willingness of banks to grant a loan depends not only on the firm's financial wealth but also on the share of FDI in total investment. We investigate the impact of variations in wealth and of country-specific macroeconomic shocks on the firm's investment decision. The results are twofold. First, decreasing wealth affects both foreign and domestic investment but the effect on foreign investment tends to be stronger. Second, country-specific macroeconomic shocks have asymmetric effects on investment depending on where the shock occurs.

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Publisher Info
Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 140 (2004)
Issue (Month): IV (December)
Pages: 449-481
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Handle: RePEc:ses:arsjes:2004-iv-1

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Related research
Keywords: multinational corporations; foreign direct investment; financial constraints; investment fluctuations;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

References listed on IDEAS
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    Other versions:
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  3. Hart, Oliver & Moore, John, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 841-79, November. [Downloadable!] (restricted)
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  4. Frankel, Jeffrey A, 1992. "Measuring International Capital Mobility: A Review," American Economic Review, American Economic Association, vol. 82(2), pages 197-202, May. [Downloadable!] (restricted)
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  6. Douglas W. Diamond & Raghuram G. Rajan, 1999. "Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking," NBER Working Papers 7430, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Michael W. Klein & Joe Peek & Eric S. Rosengren, 2002. "Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit," American Economic Review, American Economic Association, vol. 92(3), pages 664-682, June. [Downloadable!]
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  8. Baxter, Marianne, 1995. "International trade and business cycles," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 35, pages 1801-1864 Elsevier. [Downloadable!] (restricted)
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  14. Assaf Razin & Efraim Sadka & Chi-Wa Yuen, 1999. "An Information-Based Model of Foreign Direct Investment: The Gains from Trade Revisited," NBER Working Papers 6884, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Marin, Dalia & Lorentowicz, Andzelika & Raubold, Alexander, 2002. "Ownership, Capital or Outsourcing: What Drives German Investment to Eastern Europe?," Discussion Papers in Economics 72, University of Munich, Department of Economics. [Downloadable!]
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  18. Markusen, James R., 2001. "Contracts, intellectual property rights, and multinational investment in developing countries," Journal of International Economics, Elsevier, vol. 53(1), pages 189-204, February. [Downloadable!] (restricted)
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  19. Agenor, Pierre-Richard & McDermott, C John & Prasad, Eswar S, 2000. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," World Bank Economic Review, Oxford University Press, vol. 14(2), pages 251-85, May. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Holger Zemanek, 2004. "Investitions- und Finanzierungsverhalten Multinationaler Unternehmen," IWH Discussion Papers 197, Halle Institute for Economic Research. [Downloadable!]
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