Financial Constraints on Investment in an Emerging Market Crisis: An Empirical Investigation of Foreign Ownership
AbstractJEL classification codes: O16, F23, E32, O12 Abstract: 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 exportersâ€™ 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. Exportersâ€™ 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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Bibliographic InfoPaper 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 qt13z7799m.
Date of creation: 13 Jul 2005
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Liquidity Constraints; Foreign Direct Investment; Financial Crisis; Indonesia;
Find related papers by JEL classification:
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
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