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Host Country Financial Development and MNC Activity


  • Davin Chor

    () (School of Economics, Singapore Management University)


We present evidence that the level of financial development in FDI recipient countries systematically affects the spatial distribution of multinational corporations' (MNCs) sales. Using detailed proprietary survey data collected by the Bureau of Economic Analysis (BEA) on US multinationalactivity abroad, we find that stronger financial development in the host country has a negative effect on the share of MNC affiliate sales that remain in the host country, indicating a reduced propensity towards horizontal FDI. Conversely, the share of affiliate sales that is re-exported to third-country destinations increases, suggesting an increased propensity towards export-platform FDI. We provide a three-country model with heterogenous firms that rationalizes these observations: More financially developed host countries foster entry by domestic firms, making the local market more competitive for MNC products. This leads MNCs to orient their affiliates away from servicing the local market towards third-country markets instead.

Suggested Citation

  • Davin Chor, 2008. "Host Country Financial Development and MNC Activity," Working Papers 12-2008, Singapore Management University, School of Economics.
  • Handle: RePEc:siu:wpaper:12-2008

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    References listed on IDEAS

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    Cited by:

    1. Philip R. Lane IIIS, Trinity College Dublin and CEPR, 2009. "Innovation and Financial Globalisation," The Institute for International Integration Studies Discussion Paper Series iiisdp299, IIIS.
    2. Kalina Manova, 2013. "Credit Constraints, Heterogeneous Firms, and International Trade," Review of Economic Studies, Oxford University Press, vol. 80(2), pages 711-744.
    3. Alfonso Irarrazabal & Andreas Moxnes & Luca David Opromolla, 2013. "The Margins of Multinational Production and the Role of Intrafirm Trade," Journal of Political Economy, University of Chicago Press, vol. 121(1), pages 74-126.
    4. Peter Egger & Christian Keuschnigg, 2015. "Innovation, Trade, and Finance," American Economic Journal: Microeconomics, American Economic Association, vol. 7(2), pages 121-157, May.

    More about this item


    Credit constraints; horizontal FDI; vertical FDI; export-platform FDI; heterogenous ¯rms.;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G20 - Financial Economics - - Financial Institutions and Services - - - General


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