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Financing FDI into Developing Economies and the International Transmission of Business Cycle Fluctuations

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  • Diemo Dietrich

Abstract

We consider a financially constrained multinational corporation with investment projects in both an industrial and a developing country. Since the collateral values of the projects' tangible assets diverge, the willingness of banks to grant a loan depends not only on the firm's financial wealth but also on the share of FDI in total investment. We investigate the impact of variations in wealth and of country-specific macroeconomic shocks on the firm's investment decision. The results are twofold. First, decreasing wealth affects both foreign and domestic investment but the effect on foreign investment tends to be stronger. Second, country-specific macroeconomic shocks have asymmetric effects on investment depending on where the shock occurs.

Suggested Citation

  • Diemo Dietrich, 2004. "Financing FDI into Developing Economies and the International Transmission of Business Cycle Fluctuations," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(IV), pages 449-481, December.
    • Handle: RePEc:ses:arsjes:2004-iv-1
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    Cited by:

    1. Diemo Dietrich & Tobias Knedlik & Axel Lindner, 2011. "Central and Eastern European countries in the global financial crisis: a typical twin crisis?," Post-Communist Economies, Taylor & Francis Journals, vol. 23(4), pages 415-432, April.
    2. Claudia M. Buch & Alexander Lipponer, 2005. "Business Cycles and FDI: Evidence from German Sectoral Data," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 141(4), pages 732-759, December.
    3. Dietrich, Diemo & Jindra, Björn, 2010. "Corporate governance in the multinational enterprise: A financial contracting perspective," International Business Review, Elsevier, vol. 19(5), pages 446-456, October.
    4. Zemanek, Holger, 2004. "Investitions- und Finanzierungsverhalten Multinationaler Unternehmen," IWH Discussion Papers 197/2004, Halle Institute for Economic Research (IWH).

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    More about this item

    Keywords

    multinational corporations; foreign direct investment; financial constraints; investment fluctuations;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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