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The (non-)resiliency of foreign direct investment in the United States during the 2007-2009 financial crisis

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  • Silvio Contessi
  • Pierangelo De Pace

Abstract

We study the contraction of Foreign Direct Investment (FDI) flows in the United States during the recent financial crisis and show their unusual non-resiliency, which depends in part on the global nature of the economic recession, but also on the increases in the cost of financing FDI in the economies in which the flows originate. To formally study the effects of external financial conditions on FDI in the United States, we exploit the three dimensions of a panel of U.S. inward FDI flows organized by recipient U.S. industries, source countries, and years for the recorded flows. Changes in the cost of finance in the source countries have little or no effect on total inward flows (the sum of equity, debt, and reinvested earnings) over the 2006-2010 period. However, U.S. industries characterized by more financial vulnerability experience statistically significant variations in the debt and equity components of inward FDI flows in response to the changes in the cost of capital that occurred in the source countries during the crisis.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2011-037.

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Date of creation: 2011
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Handle: RePEc:fip:fedlwp:2011-037

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Keywords: Capital movements ; Financial crises ; Investments; Foreign;

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  1. Gian-Maria Milesi-Ferretti, Cédric Tille, 2010. "The Great Retrenchment: International Capital Flows During the Global Financial Crisis," IHEID Working Papers 18-2010, Economics Section, The Graduate Institute of International Studies, revised 15 Sep 2010.
  2. Contessi, Silvio & De Pace, Pierangelo & Francis, Johanna L., 2013. "The cyclical properties of disaggregated capital flows," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 528-555.
  3. Chor, Davin & Manova, Kalina, 2012. "Off the cliff and back? Credit conditions and international trade during the global financial crisis," Journal of International Economics, Elsevier, vol. 87(1), pages 117-133.
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  7. Andrei A. Levchenko & Logan Lewis & Linda L. Tesar, 2009. "The Collapse of International Trade During the 2008-2009 Crisis: In Search of the Smoking Gun," Working Papers 592, Research Seminar in International Economics, University of Michigan.
  8. Düwel, Cornelia & Frey, Rainer & Lipponer, Alexander, 2011. "Cross-border bank lending, risk aversion and the financial crisis," Discussion Paper Series 1: Economic Studies 2011,29, Deutsche Bundesbank, Research Centre.
  9. Barseghyan, Levon & DiCecio, Riccardo, 2011. "Cross-country income convergence revisited," Economics Letters, Elsevier, vol. 113(3), pages 244-247.
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  11. Katherine A. Smith & Diego Valderrama, 2007. "The composition of capital inflows when emerging market firms face financing constraints," Working Paper Series 2007-13, Federal Reserve Bank of San Francisco.
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Cited by:
  1. Eugen Tereanu & Johanna L. Francis & Dilek Aykut, 2010. "The Cost of Private Debt Over the Credit Cycle," IMF Working Papers 10/283, International Monetary Fund.

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