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Investment Behaviour of Financially Constrained Multinational Corporations: Consequences for the International Transmission of Business Cycle Fluctuations

  • Diemo Dietrich

The paper investigates the investment decision of a financially constrained multinational corporation (MNC) planning investment projects both at home and in a developing country. The collateral values of the projects diverge because of country specific transactions costs so that the willingness of banks to grant a loan depends not only on the MNCs financial wealth but also on the share of FDI in total investment. It is shown that i) variations in the MNCs financial standing affects FDI stronger than domestic investment, ii) FDI is likely to decrease following a macroeconomic shock to the MNC parent, and iii) domestic investment is likely to increase following a macroeconomic shock to the MNC affiliate.

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File URL: http://www.iwh-halle.de/d/publik/disc/165.pdf
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Paper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 165.

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Date of creation: Jul 2002
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Handle: RePEc:iwh:dispap:165
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  11. Razin, A. & Sadka, E. & Yuen, C.W., 1997. "Chanelling Domestic Saving into Productive Investment Under Asymmetric Information: The Essential Role of Foreign Direct Investment," Papers 36-97, Tel Aviv.
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  17. Aart Kraay & Jaume Ventura, 2007. "Comparative Advantage and the Cross-section of Business Cycles," Journal of the European Economic Association, MIT Press, vol. 5(6), pages 1300-1333, December.
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  21. Marin, Dalia & Lorentowicz, Andzelika & Raubold, Alexander, 2002. "Ownership, Capital or Outsourcing: What Drives German Investment to Eastern Europe?," Discussion Papers in Economics 72, University of Munich, Department of Economics.
  22. Razin, A. & Sadka, E. & Yuen, C.-W., 1998. "An Information-Based Model of Foreign Direct Investment: the Gains from Trade Revisited," Papers 28-98, Tel Aviv.
  23. C. John McDermott & Eswar Prasad & Pierre-Richard Agénor, 1999. "Macroeconomic Fluctuations in Developing Countries; Some Stylized Facts," IMF Working Papers 99/35, International Monetary Fund.
  24. Marianne Baxter, 1995. "International Trade and Business Cycles," NBER Working Papers 5025, National Bureau of Economic Research, Inc.
  25. Frankel, Jeffrey A, 1992. "Measuring International Capital Mobility: A Review," American Economic Review, American Economic Association, vol. 82(2), pages 197-202, May.
  26. Eric S. Rosengren & Joe Peek, 2000. "Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States," American Economic Review, American Economic Association, vol. 90(1), pages 30-45, March.
  27. Blomstrom, Magnus & Kokko, Ari, 1997. "How foreign investment affects host countries," Policy Research Working Paper Series 1745, The World Bank.
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