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Multinational Firms and Business Cycle Transmission

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  • Menno, Dominik

Abstract

This paper studies the effect of foreign direct investment (FDI) on the transmission of international business cycles. I document for the G7 countries between 1991 and 2006 that increases in bilateral FDI linkages are associated with more synchronized investment cycles. I also find that the relation between FDI integration and synchronization of gross domestic product (GDP) is \-- yet positive \-- statistically insignificant after controlling for time fixed effects. I then study a model of international business cycles with an essential role for FDI and shocks to multinational activity. In the model, more FDI openness unambiguously increases investment synchronization while the effect on GDP synchronization is ambivalent. Due to mismeasurement of intangible capital in national accounts, the actual elasticity of output synchronization with respect to FDI integration is underestimated. The effects measured in the data are quantitatively consistent with the model predictions. Finally, I show that more FDI increases households' welfare by reducing aggregate risk on the production side; this effect,however, is partially mitigated by multinational specific shocks.

Suggested Citation

  • Menno, Dominik, 2014. "Multinational Firms and Business Cycle Transmission," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100320, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc14:100320
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    Cited by:

    1. Javier Cravino & Andrei A. Levchenko, 2017. "Multinational Firms and International Business Cycle Transmission," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(2), pages 921-962.
    2. Alexios Anagnostopoulos & Orhan Erem Atesagaoglu & Elisa Faraglia & Chryssi Giannitsarou, 2019. "Foreign Direct Investment as a Determinant of Cross-Country Stock Market Comovement," Discussion Papers 1912, Centre for Macroeconomics (CFM).

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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