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Financial Frictions, Foreign Direct Investment, and Growth

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  • Luis San Vicente Portes
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    Abstract

    This paper assesses the role of financial frictions and Foreign Direct Investment (FDI) on an economy´s growth rate, business cycle volatility, and firm´s capital structure. We gauge these effects within the Financial Accelerator framework, where entrepreneurs can establish affiliates of local firms abroad through Foreign Direct Investment. Model simulations suggest that in the presence of credit market imperfections FDI is associated with faster growth, less leverage, and lower aggregate volatility. These features are consistent with the macroeconomic dynamics of the more globally integrated economies over the last three decades.

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    File URL: http://www.fiw.ac.at/fileadmin/Documents/Publikationen/Working_Paper/N_041-portes.pdf
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    Bibliographic Info

    Paper provided by FIW in its series FIW Working Paper series with number 041.

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    Length: 32
    Date of creation: Jan 2010
    Date of revision:
    Handle: RePEc:wsr:wpaper:y:2010:i:041

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    Related research

    Keywords: Output volatility; Foreign Direct Investment; International Diversification; Capital Structure;

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