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Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance

  • Laura Alfaro

    ()

    (Harvard Business School, Business, Government and the International Economy Unit)

  • Maggie Chen

    ()

    (George Washington University)

We examine in this paper the differential response of establishments to the global financial crisis, with particular emphasis on the role of foreign direct investment (FDI) in determining micro economic performance. Using a new worldwide dataset that reports the activities of more than 12 million establishments before and after 2008, we investigate how multinationals around the world responded to the crisis relative to local firms. We explore three distinct channels through which FDI affects establishment performance, (i) production linkages, (ii) financial linkages, and (iii) multinational networks. Our analysis shows that while multinational owned establishments performed, on average, better than their local competitors, there is considerable heterogeneity in the role of FDI. First, multinationals located in countries that experienced sharper declines in aggregate output, demand, and credit conditions displayed a greater advantage over local firms. Multinationals headquartered in countries with a greater incidence of the crisis, in contrast, fared less satisfactorily abroad. Second, multinationals that engaged in activities with vertical production linkages or stronger financial constraints exhibited particularly better responses compared to local firms. Finally, being part of a larger multinational network also led to superior economic performance.

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File URL: http://www.hbs.edu/research/pdf/10-110.pdf
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Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 10-110.

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Length: 44 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:hbs:wpaper:10-110
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