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Host Country Financial Development and MNC Activity

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  • Davin Chor

    (SMU)

  • Kalina Manova
  • Stanley B. Watt

Abstract

We present evidence that the level of financial development in FDI recipient countries systematically aects the spatial distribution of multinational corporations' (MNCs) sales. Using detailed proprietary survey data collected by the Bureau of Economic Analysis (BEA) on US multinational activity abroad, we find that stronger financial development in the host country has a negative effect on the share of MNC affiliate sales that remain in the host country, indicating a reduced propensity towards horizontal FDI. Conversely, the share of affiliate sales that is re-exported to third-country destinations increases, suggesting an increased propensity towards export-platform FDI. We provide a three-country model with heterogenous firms that rationalizes these observations : More financially developed host countries foster entry by domestic firms, making the local market more competitive for MNC products. This leads MNCs to orient their affiliates away from servicing the local market towards third-country markets instead.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 22068.

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Date of creation: Jan 2007
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Handle: RePEc:eab:financ:22068

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Cited by:
  1. Kalina Manova, 2008. "Credit Constraints, Heterogeneous Firms, and International Trade," NBER Working Papers 14531, National Bureau of Economic Research, Inc.
  2. Christian Keuschnigg & Peter Egger, 2010. "Innovation, Trade and Finance," University of St. Gallen Department of Economics working paper series 2010 2010-08, Department of Economics, University of St. Gallen.
  3. Philip R. Lane IIIS, Trinity College Dublin and CEPR, 2009. "Innovation and Financial Globalisation," The Institute for International Integration Studies Discussion Paper Series iiisdp299, IIIS.
  4. Irarrazabal, Alfonso & Moxnes, Andreas & Opromolla, Luca David, 2009. "The Margins of Multinational Production and the Role of Intra-firm trade," CEPR Discussion Papers 7145, C.E.P.R. Discussion Papers.

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