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Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit

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  • Michael W. Klein
  • Joe Peek
  • Eric S. Rosengren

Abstract

During the 1980's, theories were developed to explain the striking correlation between real exchange rates and foreign direct investment (FDI). However, this relationship broke down for Japanese FDI in the 1990's, as the real exchange rate appreciated while FDI plummeted. We propose the relative access to credit hypothesis and show that unequal access to credit by Japanese firms contributes to the explanation of declining Japanese FDI. Using bank-level and firm-level data sets, we find that financial difficulties at banks were economically and statistically important in reducing the number of FDI projects by Japanese firms into the United States. (JEL G21, F36)

Suggested Citation

  • Michael W. Klein & Joe Peek & Eric S. Rosengren, 2002. "Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit," American Economic Review, American Economic Association, vol. 92(3), pages 664-682, June.
  • Handle: RePEc:aea:aecrev:v:92:y:2002:i:3:p:664-682
    Note: DOI: 10.1257/00028280260136309
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    References listed on IDEAS

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    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • G2 - Financial Economics - - Financial Institutions and Services

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