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Financial Frictions and Foreign Direct Investment: Theory and Evidence from Japanese Microdata

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  • Horst Raff
  • Michael Ryan
  • Frank Stähler

Abstract

We use Japanese microdata to examine how financial market frictions affect foreign direct investment (FDI). The Japanese land price bubble and banking trouble in the late 1980s and early 1990s serve as a quasi natural experiment to identify two possible transmission channels from financial shocks to FDI: (i) a collateral channel, whereby changes in the value of collateral affect investors’ ability to borrow; and (ii) a lending channel, whereby changes in bank health affect banks’ ability to lend. We find evidence that both transmission channels are statistically significant and economically important.

Suggested Citation

  • Horst Raff & Michael Ryan & Frank Stähler, 2015. "Financial Frictions and Foreign Direct Investment: Theory and Evidence from Japanese Microdata," CESifo Working Paper Series 5260, CESifo.
    • Handle: RePEc:ces:ceswps:_5260
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    More about this item

    Keywords

    foreign direct investment; multinational enterprise; financing; credit rationing; collateral; bank health; Japan;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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