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Financial Constraints on Investment in an Emerging Market Crisis: An Empirical Investigation of Foreign Ownership

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Author Info
Garrick Blalock (Cornell University)
Paul Gertler (University of Caifornia, Berkeley and NBER)
David I. Levine (Haas School of Business, UC Berkeley)

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Abstract

JEL classification codes: O16, F23, E32, O12Abstract:We investigate whether capital market imperfections constrain investment during an emerging market financial crisis. Both large currency devaluations and widespread collapse of the banking sector characterize recent crises. Although a currency devaluation should increase exporters' competitiveness and investment, a failing banking system may limit credit to these firms. Foreign-owned firms, which have greater access to overseas financing but otherwise face the same investment prospects, provide an ideal control group for determining the effect of liquidity constraints. We test for liquidity constraints in Indonesia following the 1997 East Asian financial crisis, a period when the issuance of new domestic credit declined rapidly. Exporters' value added and employment increased after the crisis, suggesting that they profited from the devaluation and had sufficient cash flow to finance more workers. However, only exporters with foreign ownership increased their investment significantly. The failure of domestic firms to invest under profitable conditions suggests that they may have faced liquidity constraints. Investment by foreign-owned firms increased post-crisis capital stock by about 4% more than would have occurred if all the firms were domestically owned.

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Paper provided by Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley in its series Center for International and Development Economics Research, Working Paper Series with number 1064.

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Date of creation: 13 Jul 2005
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Handle: RePEc:cdl:ciders:1064

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Related research
Keywords: Liquidity Constraints; Foreign Direct Investment; Financial Crisis; Indonesia;

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References listed on IDEAS
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    Other versions:
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    Other versions:
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  11. Ricardo Caballero & Arvind Krishnamurthy, 1998. "Emerging Market Crises: An Asset Markets Perspective," Working papers 98-18, Massachusetts Institute of Technology (MIT), Department of Economics.
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  12. Minton, Bernadette A. & Schrand, Catherine, 1999. "The impact of cash flow volatility on discretionary investment and the costs of debt and equity financing," Journal of Financial Economics, Elsevier, vol. 54(3), pages 423-460, December. [Downloadable!] (restricted)
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  15. Brian J. Aitken & Ann E. Harrison, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, vol. 89(3), pages 605-618, June. [Downloadable!] (restricted)
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