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What Drives Capital Flows? The Case of Cross-Border M&A Activity and Financial Deepening

  • di Giovanni, Julian

What macroeconomic and financial variables play key roles in the foreign direct investment decision (FDI) of firms? This question is addressed in this paper using a large panel data set of cross-border Merger & Acquisition (M&A) deals for the period 1990-1999. Various econometric specifications are built around the simple "gravity model" commonly used in the trade literature. Interestingly, financial variables and other institutional factors seem to play a significant role in M&A flows. In particular the size of financial markets, as measured by the stock market capitalization to GDP ratio and the credit provided to the private sector by financial institutions to GDP ratio in the domestic economy, have sizeable positive effects on the incentives for domestic firms to invest abroad.

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Paper provided by Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley in its series Center for International and Development Economics Research, Working Paper Series with number qt7nq6d7wp.

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Date of creation: 01 Jan 2002
Date of revision:
Handle: RePEc:cdl:ciders:qt7nq6d7wp
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