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Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance

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Author Info

  • Laura Alfaro

    ()
    (Harvard Business School, Business, Government and the International Economy Unit)

  • Maggie Chen

    ()
    (George Washington University)

Abstract

We examine in this paper the differential response of establishments to the global financial crisis, with particular emphasis on the role of foreign direct investment (FDI) in determining micro economic performance. Using a new worldwide dataset that reports the activities of more than 12 million establishments before and after 2008, we investigate how multinationals around the world responded to the crisis relative to local firms. We explore three distinct channels through which FDI affects establishment performance, (i) production linkages, (ii) financial linkages, and (iii) multinational networks. Our analysis shows that while multinational owned establishments performed, on average, better than their local competitors, there is considerable heterogeneity in the role of FDI. First, multinationals located in countries that experienced sharper declines in aggregate output, demand, and credit conditions displayed a greater advantage over local firms. Multinationals headquartered in countries with a greater incidence of the crisis, in contrast, fared less satisfactorily abroad. Second, multinationals that engaged in activities with vertical production linkages or stronger financial constraints exhibited particularly better responses compared to local firms. Finally, being part of a larger multinational network also led to superior economic performance.

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Bibliographic Info

Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 10-110.

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Length: 44 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:hbs:wpaper:10-110

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Related research

Keywords: global financial crisis; establishment response; foreign direct investment; production linkage; financial linkage; network;

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Cited by:
  1. Martin Borowiecki & Bernhard Dachs & Doris Hanzl-Weiss & Steffen Kinkel & Johannes Pöschl & Magdolna Sass & Thomas Christian Schmall & Robert Stehrer & Andrea Szalavetz, 2012. "Global Value Chains and the EU Industry," wiiw Research Reports 383, The Vienna Institute for International Economic Studies, wiiw.
  2. Kalemli-Ozcan, Sebnem & Kamil, Herman & Villegas-Sanchez, Carolina, 2011. "What Hinders Investment in the Aftermath of Financial Crises: Insolvent Firms or Illiquid Banks?," CEPR Discussion Papers 8543, C.E.P.R. Discussion Papers.
  3. Vintila Denisia Mariana, 2011. "Foreign Direct Investments During Financial Crises," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 41-45, December.
  4. Jie Cai & Lian An, 2014. "Is Protectionism Rational Under the Financial Crisis? Analysis from the Perspective of International Political Relations," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(3), pages 278-299, March.
  5. DORNEAN Adina & OANEA Dumitru-Cristian, 2013. "Foreign Direct Investment And Post Crisis Economic Growth. Evidence From European Union," Revista Economica, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 65(6), pages 46-60.

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