IDEAS home Printed from https://ideas.repec.org/a/bla/rdevec/v19y2015i2p387-399.html
   My bibliography  Save this article

Fire-sale FDI? The Impact of Financial Crises on Foreign Direct Investment

Author

Listed:
  • Olga Stoddard
  • Ilan Noy

Abstract

We analyze the evolution of foreign direct investment (FDI) inflows to developing and emerging countries around financial crises. We empirically examine the Fire-Sale FDI hypothesis and describe the pattern of FDI inflows surrounding financial crises. We also add a more granular detail about the types of financial crises and their potentially differential effects on FDI. We distinguish between mergers and acquisitions (M&A) and greenfield investment, as well as between horizontal (tariff jumping) and vertical (integrating production stages) FDI. We find that financial crises have a strong negative effect on inward FDI in our sample. Crises are also shown to reduce the value of horizontal and vertical FDI. We do not find empirical evidence of fire-sale FDI; on the contrary, financial crises are shown to affect FDI flows and M&A activity negatively.

Suggested Citation

  • Olga Stoddard & Ilan Noy, 2015. "Fire-sale FDI? The Impact of Financial Crises on Foreign Direct Investment," Review of Development Economics, Wiley Blackwell, vol. 19(2), pages 387-399, May.
    • Handle: RePEc:bla:rdevec:v:19:y:2015:i:2:p:387-399
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/rode.12149
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. P Srinivasan, 2011. "Determinants of Foreign Direct Investment in SAARC Nations: An Econometric Investigation," The IUP Journal of Managerial Economics, IUP Publications, vol. 0(3), pages 26-42, August.
    2. Honohan,Patrick & Laeven,Luc (ed.), 2005. "Systemic Financial Crises," Cambridge Books, Cambridge University Press, number 9780521851855.
    3. Robert P. Flood & Peter M. Garber, 1991. "The Linkage Between Speculative Attack and Target Zone Models of Exchange Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1367-1372.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    5. Aizenman, Joshua & Noy, Ilan, 2006. "FDI and trade--Two-way linkages?," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(3), pages 317-337, July.
    6. Mr. Luc Laeven & Mr. Fabian Valencia, 2010. "Resolution of Banking Crises: The Good, the Bad, and the Ugly," IMF Working Papers 2010/146, International Monetary Fund.
    7. Joshua Aizenman & Ilan Noy, 2009. "Endogenous Financial and Trade Openness," Review of Development Economics, Wiley Blackwell, vol. 13(2), pages 175-189, May.
    8. David L. Carr & James R. Markusen & Keith E. Maskus, 2021. "Estimating The Knowledge-Capital Model of the Multinational Enterprise," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 5, pages 95-110, World Scientific Publishing Co. Pte. Ltd..
    9. Head, Keith & Mayer, Thierry & Ries, John, 2010. "The erosion of colonial trade linkages after independence," Journal of International Economics, Elsevier, vol. 81(1), pages 1-14, May.
    10. Rose, Andrew K., 2005. "One reason countries pay their debts: renegotiation and international trade," Journal of Development Economics, Elsevier, vol. 77(1), pages 189-206, June.
    11. Hutchison, Michael M. & Noy, Ilan, 2006. "Sudden stops and the Mexican wave: Currency crises, capital flow reversals and output loss in emerging markets," Journal of Development Economics, Elsevier, vol. 79(1), pages 225-248, February.
    12. Bruce A. Blonigen & Jeremy Piger, 2019. "Determinants of Foreign Direct Investment," World Scientific Book Chapters, in: Foreign Direct Investment, chapter 1, pages 3-54, World Scientific Publishing Co. Pte. Ltd..
    13. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2001. "Prospective Deficits and the Asian Currency Crisis," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1155-1197, December.
    14. Dooley, Michael P, 2000. "A Model of Crises in Emerging Markets," Economic Journal, Royal Economic Society, vol. 110(460), pages 256-272, January.
    15. Allan Drazen & Paul R. Masson, 1994. "Credibility of Policies Versus Credibility of Policymakers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 735-754.
    16. Hyun Song Shin & Viral Acharya & Tanju Yorulmazer, 2011. "Fire Sale FDI," Korean Economic Review, Korean Economic Association, vol. 27, pages 163-202.
    17. Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
    18. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "Paper tigers?: A model of the Asian crisis," European Economic Review, Elsevier, vol. 43(7), pages 1211-1236, June.
    19. Bergstrand, Jeffrey H. & Egger, Peter, 2007. "A knowledge-and-physical-capital model of international trade flows, foreign direct investment, and multinational enterprises," Journal of International Economics, Elsevier, vol. 73(2), pages 278-308, November.
    20. Dell'Ariccia, Giovanni & Detragiache, Enrica & Rajan, Raghuram, 2008. "The real effect of banking crises," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 89-112, January.
    21. Uhlig, Harald, 2010. "A model of a systemic bank run," Journal of Monetary Economics, Elsevier, vol. 57(1), pages 78-96, January.
    22. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
    23. Mihir A. Desai & C. Fritz Foley & Kristin J. Forbes, 2008. "Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Depreciations," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2857-2888, November.
    24. Christophe Chamley, 2003. "Dynamic Speculative Attacks," American Economic Review, American Economic Association, vol. 93(3), pages 603-621, June.
    25. Bruce A. Blonigen, 2019. "Firm-Specific Assets and the Link Between Exchange Rates and Foreign Direct Investment," World Scientific Book Chapters, in: Foreign Direct Investment, chapter 3, pages 89-120, World Scientific Publishing Co. Pte. Ltd..
    26. Rossi, Stefano & Volpin, Paolo F., 2004. "Cross-country determinants of mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 74(2), pages 277-304, November.
    27. Head, Keith & Ries, John, 2008. "FDI as an outcome of the market for corporate control: Theory and evidence," Journal of International Economics, Elsevier, vol. 74(1), pages 2-20, January.
    28. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    29. Calderon, Cesar & Loayza, Norman & Serven, Luis, 2004. "Greenfield foreign direct investment and mergers and acquisitions - feedback and macroeconomic effects," Policy Research Working Paper Series 3192, The World Bank.
    30. Soliman, Mohamed M., 2005. "The Effect of Currency Crises on Foreign Direct Investment Activity in Emerging Markets," Review of Applied Economics, Lincoln University, Department of Financial and Business Systems, vol. 1(2), pages 1-18.
    31. Roberto Chang & Andres Velasco, 2001. "A Model of Financial Crises in Emerging Markets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(2), pages 489-517.
    32. Reinhart, Carmen & Rogoff, Kenneth, 2009. "This Time It’s Different: Eight Centuries of Financial Folly-Preface," MPRA Paper 17451, University Library of Munich, Germany.
    33. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    34. Miao Wang & M. C. Sunny Wong, 2009. "What Drives Economic Growth? The Case of Cross‐Border M&A and Greenfield FDI Activities," Kyklos, Wiley Blackwell, vol. 62(2), pages 316-330, April.
    35. Elizabeth Asiedu & James Freeman, 2009. "The Effect of Corruption on Investment Growth: Evidence from Firms in Latin America, Sub‐Saharan Africa, and Transition Countries," Review of Development Economics, Wiley Blackwell, vol. 13(2), pages 200-214, May.
    36. Bruce A. Blonigen & Miao Wang, 2004. "Inappropriate Pooling of Wealthy and Poor Countries in Empirical FDI Studies," NBER Working Papers 10378, National Bureau of Economic Research, Inc.
    37. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
    38. Barro, Robert J. & Lee, Jong Wha, 2013. "A new data set of educational attainment in the world, 1950–2010," Journal of Development Economics, Elsevier, vol. 104(C), pages 184-198.
    39. Silvio Contessi & Pierangelo De Pace, 2012. "(Non-)Resiliency Of Foreign Direct Investment In The United States During The 2007–2009 Financial Crisis," Pacific Economic Review, Wiley Blackwell, vol. 17(3), pages 368-390, August.
    40. Aizenman, Joshua & Marion, Nancy, 2004. "The merits of horizontal versus vertical FDI in the presence of uncertainty," Journal of International Economics, Elsevier, vol. 62(1), pages 125-148, January.
    41. Reinhart, Carmen & Rogoff, Kenneth, 2009. "This Time It’s Different: Eight Centuries of Financial Folly-Chapter 1," MPRA Paper 17452, University Library of Munich, Germany.
    42. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
    43. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
    44. Michael D. Bordo & John S. Landon-Lane, 2010. "The Global Financial Crisis of 2007-08: Is it Unprecedented?," NBER Working Papers 16589, National Bureau of Economic Research, Inc.
    45. David Roodman, 2009. "A Note on the Theme of Too Many Instruments," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 135-158, February.
    46. Cédric Tille, 2012. "Sailing Through This Storm? Capital Flows In Asia During The Crisis," Pacific Economic Review, Wiley Blackwell, vol. 17(3), pages 467-488, August.
    47. Cesar Calderon & Tatiana Didier, 2009. "Will FDI be Resilient in this Crisis?," World Bank Publications - Reports 11000, The World Bank Group.
    48. Romita Biswas, 2002. "Determinants of Foreign Direct Investment," Review of Development Economics, Wiley Blackwell, vol. 6(3), pages 492-504, October.
    49. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    50. Enrique G. Mendoza, 2010. "Sudden Stops, Financial Crises, and Leverage," American Economic Review, American Economic Association, vol. 100(5), pages 1941-1966, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kingsley Ikechukwu Okere & Obumneke Bob Muoneke & Favour Chidinma Onuoha & Philip C. Omoke, 2022. "Tripartite relationship between FDI, trade openness and economic growth amidst global economic crisis in Nigeria: application of combined cointegration and augmented ARDL analysis," Future Business Journal, Springer, vol. 8(1), pages 1-23, December.
    2. Mukherjee, Rahul & Proebsting, Christian, 2021. "Acquirers and financial constraints: Theory and evidence from emerging markets," Journal of International Money and Finance, Elsevier, vol. 117(C).
    3. Alberto Botta & Giuliano Toshiro Yajima & Gabriel Porcile, 2023. "Structural change, productive development, and capital flows: does financial “bonanza” cause premature deindustrialization?," Industrial and Corporate Change, Oxford University Press, vol. 32(2), pages 433-473.
    4. Hayakawa, Kazunobu & Hyun-Hoon, Lee & Cyn-Young, Park, 2022. "Impacts of COVID-19 on foreign direct investment," IDE Discussion Papers 831, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    5. 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.
    6. Nachiket Thakkar & Kiran Ambreen Ayub, 2022. "External Debt Default and Foreign Direct Investments," Bulletin of Applied Economics, Risk Market Journals, vol. 9(2), pages 223-237.
    7. Narendar Rao & K. Reddy, 2015. "The impact of the global financial crisis on cross-border mergers and acquisitions: a continental and industry analysis," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 5(2), pages 309-341, December.
    8. Ajide Folorunsho M. & Osinubi Tolulope T., 2020. "Covid-19 Pandemic and Outward Foreign Direct Investment: A Preliminary Note," Economics, Sciendo, vol. 8(2), pages 79-88, December.
    9. S. Veeramani & Abha Shukla & Mariam Jamaleh, 2020. "Financial theories of foreign direct investment: a review of literature," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 47(2), pages 185-217, June.
    10. Yongliang Zhang & Md. Qamruzzaman & Salma Karim & Ishrat Jahan, 2021. "Nexus between Economic Policy Uncertainty and Renewable Energy Consumption in BRIC Nations: The Mediating Role of Foreign Direct Investment and Financial Development," Energies, MDPI, vol. 14(15), pages 1-29, August.
    11. Kahouli, Bassem & Maktouf, Samir, 2015. "The determinants of FDI and the impact of the economic crisis on the implementation of RTAs: A static and dynamic gravity model," International Business Review, Elsevier, vol. 24(3), pages 518-529.
    12. Rowland Tochukwu Obiakor & Kingsley Ikechukwu Okere & Obumneke Bob Muoneke & Nnamdi Chinwendu Nwaeze, 2022. "Accounting for the symmetric and asymmetric effects of FDI-growth nexus amidst financial crises, economic crises and COVID-19 pandemic: application of hidden co-integration," Future Business Journal, Springer, vol. 8(1), pages 1-15, December.
    13. Muhammad Zubair Chishti, 2023. "COVID-19 and FDI nexus in Pakistan: fresh evidence from QARDL and time-varying casualty techniques," Future Business Journal, Springer, vol. 9(1), pages 1-18, December.
    14. Martijn J. Burger & Elena I. Ianchovichina, 2017. "Surges and stops in greenfield and M&A FDI flows to developing countries: analysis by mode of entry," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(2), pages 411-432, May.
    15. Cruz, Manuel David & Jha, Chandan Kumar & Kırşanlı, Fatih & Sedai, Ashish Kumar, 2023. "Corruption and FDI in natural resources: The role of economic downturn and crises," Economic Modelling, Elsevier, vol. 119(C).
    16. Arup Kumar Chattopadhyay & Debdas Rakshit & Payel Chatterjee & Ananya Paul, 2022. "Trends and Determinants of FDI with Implications of COVID-19 in BRICS," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 14(1), pages 43-59, January.
    17. Anusha Chari, 2020. "The International Market for Corporate Control," NBER Working Papers 26843, National Bureau of Economic Research, Inc.
    18. Saleh, Emad Alchikh, 2023. "The effects of economic and financial crises on FDI: A literature review," Journal of Business Research, Elsevier, vol. 161(C).
    19. Furceri, Davide & Zdzienicka, Aleksandra, 2012. "Banking Crises and Short and Medium Term Output Losses in Emerging and Developing Countries: The Role of Structural and Policy Variables," World Development, Elsevier, vol. 40(12), pages 2369-2378.
    20. Syed Ali Raza & Mohd Zaini Abd Karim, 2018. "Influence of Systemic Banking Crises and Currency Crises on the FDI-Growth Nexus: Evidence from China," Global Business Review, International Management Institute, vol. 19(3), pages 572-589, June.
    21. Junyong Lee & Kyounghun Lee & Frederick Dongchuhl Oh, 2023. "Religion and Equity Home Bias," Open Economies Review, Springer, vol. 34(5), pages 1015-1038, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Olga Stoddard & Ilan Noy, 2015. "Fire-sale FDI? The Impact of Financial Crises on Foreign Direct Investment," Review of Development Economics, Wiley Blackwell, vol. 19(2), pages 387-399, May.
    2. Stijn Claessens & M. Ayhan Kose, 2013. "Financial Crises: Explanations, Types and Implications," CAMA Working Papers 2013-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. Bordo, M.D. & Meissner, C.M., 2016. "Fiscal and Financial Crises," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 355-412, Elsevier.
    4. Grodecka-Messi, Anna & Kenny, Seán & Ögren, Anders, 2021. "Predictors of bank distress: The 1907 crisis in Sweden," Explorations in Economic History, Elsevier, vol. 80(C).
    5. Piersanti, Giovanni, 2012. "The Macroeconomic Theory of Exchange Rate Crises," OUP Catalogue, Oxford University Press, number 9780199653126, Decembrie.
    6. Akhilesh K. Verma & Rajeswari Sengupta, 2021. "Interlinkages between external debt financing, credit cycles and output fluctuations in emerging market economies," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 157(4), pages 965-1001, November.
    7. Albertazzi, Ugo & Barbiero, Francesca & Marqués-Ibáñez, David & Popov, Alexander & Rodriguez d’Acri, Costanza & Vlassopoulos, Thomas, 2020. "Monetary policy and bank stability: the analytical toolbox reviewed," Working Paper Series 2377, European Central Bank.
    8. Kris James Mitchener & Gonçalo Pina, 2016. "Pegxit Pressure: Evidence from the Classical Gold Standard," NBER Working Papers 22844, National Bureau of Economic Research, Inc.
    9. Croitoru, Lucian, 2013. "Liquidity, the October 2008 Speculative Attack and the Central Bank Reputation," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 18-51, June.
    10. Ryota Nakatani, 2017. "The Effects of Productivity Shocks, Financial Shocks, and Monetary Policy on Exchange Rates: An Application of the Currency Crisis Model and Implications for Emerging Market Crises," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(11), pages 2545-2561, November.
    11. Karatas, B., 2014. "Financial crisis and monetary policy," Other publications TiSEM 41e463f0-e122-4379-8db5-6, Tilburg University, School of Economics and Management.
    12. Claudio Borio, 2011. "Rediscovering the Macroeconomic Roots of Financial Stability Policy: Journey, Challenges, and a Way Forward," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 87-117, December.
    13. Eijffinger, Sylvester C.W. & Karataş, Bilge, 2023. "Three sisters: The interlinkage between sovereign debt, currency, and banking crises," Journal of International Money and Finance, Elsevier, vol. 131(C).
    14. Rodriguez, Cesar M., 2017. "The growth effects of financial openness and exchange rates," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 492-512.
    15. Abdilahi Ali & Katsushi S. Imai, 2015. "Editor's choice Crises, Economic Integration and Growth Collapses in African Countries," Journal of African Economies, Centre for the Study of African Economies, vol. 24(4), pages 471-501.
    16. Ebrahimi Kahou, Mahdi & Lehar, Alfred, 2017. "Macroprudential policy: A review," Journal of Financial Stability, Elsevier, vol. 29(C), pages 92-105.
    17. Levine, Oliver & Warusawitharana, Missaka, 2021. "Finance and productivity growth: Firm-level evidence," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 91-107.
    18. Bertrand Candelon & Franz Palm, 2010. "Banking and Debt Crises in Europe: The Dangerous Liaisons?," De Economist, Springer, vol. 158(1), pages 81-99, April.
    19. Carmen M. Reinhart & Christoph Trebesch, 2016. "The International Monetary Fund: 70 Years of Reinvention," Journal of Economic Perspectives, American Economic Association, vol. 30(1), pages 3-28, Winter.
    20. Fernando Mistura & Caroline Roulet, 2019. "The determinants of Foreign Direct Investment: Do statutory restrictions matter?," OECD Working Papers on International Investment 2019/01, OECD Publishing.

    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F29 - International Economics - - International Factor Movements and International Business - - - Other
    • G01 - Financial Economics - - General - - - Financial Crises
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:rdevec:v:19:y:2015:i:2:p:387-399. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=1363-6669 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.