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Host Country Financial Development and MNC Activity

Author

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  • Davin Chor

    (School of Economics, Singapore Management University)

Abstract

We present evidence that the level of financial development in FDI recipient countries systematically affects the spatial distribution of multinational corporations' (MNCs) sales. Using detailed proprietary survey data collected by the Bureau of Economic Analysis (BEA) on US multinationalactivity 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.

Suggested Citation

  • Davin Chor, 2008. "Host Country Financial Development and MNC Activity," Working Papers 12-2008, Singapore Management University, School of Economics.
    • Handle: RePEc:siu:wpaper:12-2008
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    Cited by:

    1. Kalina Manova, 2013. "Credit Constraints, Heterogeneous Firms, and International Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(2), pages 711-744.
    2. Qing Liu & Larry D. Qiu, 2014. "Implications of Financial Development of the South for Trade and Foreign Direct Investment from the North," Review of Development Economics, Wiley Blackwell, vol. 18(2), pages 272-285, May.
    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. von Ehrlich, Maximilian & Seidel, Tobias, 2015. "Regional implications of financial market development: Industry location and income inequality," European Economic Review, Elsevier, vol. 73(C), pages 85-102.
    5. Peter Egger & Christian Keuschnigg, 2015. "Innovation, Trade, and Finance," American Economic Journal: Microeconomics, American Economic Association, vol. 7(2), pages 121-157, May.
    6. Martin Kliem & Alexander Kriwoluzky, 2014. "Toward a Taylor Rule for Fiscal Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 294-302, April.
    7. Martin Kliem & Alexander Kriwoluzky, 2014. "Toward a Taylor Rule for Fiscal Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 294-302, April.
    8. Mohsen Bahmani-Oskooee & Shady Kholdy & Ahmad Sohrabian, 2013. "Do MNCs spur financial markets in corrupt host countries?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(2), pages 308-317, April.
    9. Alfonso Irarrazabal & Andreas Moxnes & Luca David Opromolla, 2013. "The Margins of Multinational Production and the Role of Intrafirm Trade," Journal of Political Economy, University of Chicago Press, vol. 121(1), pages 74-126.
    10. Joel Rodrigue, 2014. "Multinational Production, Exports and Aggregate Productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 243-261, April.
    11. Fagbemi, Fisayo & Olufolahan, Toyin, 2019. "Capital inflows, financial development and poverty reduction in Nigeria," MPRA Paper 112784, University Library of Munich, Germany, revised 04 Apr 2019.

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    More about this item

    Keywords

    Credit constraints; horizontal FDI; vertical FDI; export-platform FDI; heterogenous ¯rms.;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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