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FDI Flows and Multinational Firm Activity

Listed author(s):
  • 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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File URL: http://econweb.fas.harvard.edu/faculty/antras/papers/ADFFinance.pdf
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File URL: http://repec.org/sed2006/up.23542.1139524092.pdf
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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
Handle: RePEc:red:sed006:266
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. Michael W. Klein & Eric S. 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. Bengt Holmstrom & Jean Tirole, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," Working papers 95-1, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  4. Michael W. Klein & Eric S. Rosengren, 1992. "The real exchange rate and foreign direct investment in the United States: relative wealth vs. relative wage effects," Working Papers 92-2, Federal Reserve Bank of Boston.
  5. Robert C. Feenstra & Gordon H. Hanson, 2004. "Ownership and Control in Outsourcing to China: Estimating the Property-Rights Theory of the Firm," NBER Working Papers 10198, National Bureau of Economic Research, Inc.
  6. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-471, June.
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  8. Andrei Shleifer & Daniel Wolfenson, 2000. "Investor Protection and Equity Markets," NBER Working Papers 7974, National Bureau of Economic Research, Inc.
  9. Blonigen, Bruce A, 1997. "Firm-Specific Assets and the Link between Exchange Rates and Foreign Direct Investment," American Economic Review, American Economic Association, vol. 87(3), pages 447-465, June.
  10. Kenneth A. Froot & Jeremy C. Stein, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1191-1217.
  11. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
  12. 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.
  13. 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.
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