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Dynamic Effects of Foreign Direct Investment When Credit Markets are Imperfect

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  • Gall, Thomas
  • Schiffbauer, Marc
  • Kubny, Julia

Abstract

This paper argues that foreign direct investment in economies with credit market imperfections may increase their vulnerability to capital flow shocks. Due to better access to financial markets foreign firms can use other wage contracts than domestic ones. This alters the domestic wage composition and the subsequent wealth distribution. When credit markets are imperfect, the wealth distribution typically determines an economy's growth potential in autarky; hence, high exposure to foreign direct investment may significantly impede the capability to recover from sudden withdrawals of foreign capital. This is substantiated by empirical evidence on durations of output recovery after systemic sudden stops. --

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Bibliographic Info

Paper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Hannover 2010 with number 5.

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Date of creation: 2010
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Handle: RePEc:zbw:gdec10:5

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Keywords: Credit market imperfections; foreign direct investment; growth; occupational choice; sudden stops;

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  1. Koen De Backer & Leo Sleuwaegen, 2002. "Does foreign direct investment crowd out domestic entrepreneurship?," Vlerick Leuven Gent Management School Working Paper Series 2002-14, Vlerick Leuven Gent Management School.
  2. David Mayer-Foulkes & Peter Nunnenkamp, 2005. "Do Multinational Enterprises Contribute to Convergence or Divergence? A Disaggregated Analysis of US FDI," DEGIT Conference Papers c010_045, DEGIT, Dynamics, Economic Growth, and International Trade.
  3. Luiz R. de Mello Jr., 1997. "Foreign Direct Investment in Developing Countries: A Selective Survey," Studies in Economics 9701, Department of Economics, University of Kent.
  4. Reis, Ana Balcao, 2006. "Welfare, taxes and foreign investment," Journal of Economic Dynamics and Control, Elsevier, vol. 30(6), pages 1045-1061, June.
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Cited by:
  1. Burger, Martijn J. & Ianchovichina, Elena I., 2014. "Surges and stops in FDI flows to developing countries : does the mode of entry make a difference ?," Policy Research Working Paper Series 6771, The World Bank.
  2. Duong, Tran Lam Anh, 2013. "An Analysis of Changes in Wealth Distribution upon the Entrance of Foreign Direct Investment Firms," Discussion Papers 2013-09, Graduate School of Economics, Hitotsubashi University.

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