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FDI Flows and Multinational Firm Activity

  • Pol Antras

    ()

    (Economics Harvard University)

  • Mihir A. Desai
  • Fritz Foley

How are foreign direct investment (FDI) flows and patterns of multinational firm (MNC) activity determined in a world with frictions in financial contracting and variations in institutional environments? As developers of technologies, MNCs have long been characterized as having comparative advantage in monitoring the deployment of their technology. The model shows that, in a setting of non-contractible monitoring and financial frictions, this comparative advantage endogenously gives rise to MNC activity and FDI flows. The mechanism generating MNC activity is not the risk of technological expropriation by local partners but the demands of external funders who require MNC participation to ensure value maximization by local entrepreneurs. The model delivers distinctive predictions for the impact of weak institutions on patterns of MNC activity and FDI flows, with weak institutional environments limiting the scale of multinational firm activity but increasing the share of that activity that is financed by multinational parents through FDI flows. In addition to accounting for distinctions between patterns of MNC activity and FDI flows, the model can help explain substantial two-way FDI flows between countries with high levels of financial development and small and unbalanced FDI flows between countries with different levels of financial development. The main predictions of the model are tested and confirmed using firm-level data on U.S. outbound FDI

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 266.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:266
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  1. Michael W. Klein & Eric Rosengren & Joe Peek, 2000. "Troubled banks, impaired foreign direct investment: the role of relative access to credit," Working Papers 00-4, Federal Reserve Bank of Boston.
  2. Shleifer, Andrei & Wolfenzon, Daniel, 2002. "Investor protection and equity markets," Journal of Financial Economics, Elsevier, vol. 66(1), pages 3-27, October.
  3. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  4. Sebnem Kalemli-Ozcan & Laura Alfaro & Vadym Volosovych, 2003. "Why doesn’t Capital Flow from Rich to Poor Countries? An Empirical Investigation," Working Papers 2003-01, Department of Economics, University of Houston.
  5. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, June.
  6. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "Serial Default and the "Paradox" of Rich-to-Poor Capital Flows," American Economic Review, American Economic Association, vol. 94(2), pages 53-58, May.
  7. Jones, Ronald W. & Neary, J. Peter & Ruane, Frances P., 1983. "Two-way capital flows : Cross-hauling in a model of foreign investment," Journal of International Economics, Elsevier, vol. 14(3-4), pages 357-366, May.
  8. Ginarte, Juan C. & Park, Walter G., 1997. "Determinants of patent rights: A cross-national study," Research Policy, Elsevier, vol. 26(3), pages 283-301, October.
  9. Robert E. Lipsey, 2001. "Foreign Direct Investment and the Operations of Multinational Firms: Concepts, History, and Data," NBER Working Papers 8665, National Bureau of Economic Research, Inc.
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