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Dynamic Effects of Foreign Direct Investment When Credit Markets are Imperfect

  • Thomas Gall

    ()

    (University of Bonn)

  • Marc Schiffbauer

    ()

    (Economic & Social Research Institute, Dublin, Ireland)

  • Julia Kubny

    ()

    (German Development Institute, Bonn, Germany)

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 different wage contracts than domestic ones. This alters the domestic wage composition and the subsequent wealth distribution. Under credit market imperfections the wealth distribution typically determines an economy’s growth potential in autarky; hence high exposure to foreign direct investment may substantially 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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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - The Institute for Economic Development Working Papers Series with number dp-188.

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Length: 32
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:bos:iedwpr:dp-188
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  1. Reis, Ana Balcao, 2006. "Welfare, taxes and foreign investment," Journal of Economic Dynamics and Control, Elsevier, vol. 30(6), pages 1045-1061, June.
  2. Luiz R. de Mello Jr., 1997. "Foreign Direct Investment in Developing Countries: A Selective Survey," Studies in Economics 9701, School of Economics, University of Kent.
  3. David Mayer-Foulkes & Peter Nunnenkamp, 2005. "Do Multinational Enterprises Contribute to Convergence or Divergence? A Disaggregated Analysis of US FDI," Kiel Working Papers 1242, Kiel Institute for the World Economy.
  4. 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.
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