Host-country financial development and multinational activity

L. Kamran Bilir, Davin Chor and Kalina Manova

European Economic Review, 2019, vol. 115, issue C, 192-220

Abstract: This paper evaluates the influence of host-country financial conditions on the global operations of multinational firms. Using detailed U.S. data, we establish that financial development in a country is associated with relatively more entry by multinational affiliates, as well as with higher aggregate affiliate sales to the local market, back to the U.S. and to third destinations, with these effects being more pronounced in financially more vulnerable sectors. At the level of individual affiliates, by contrast, these forces are associated with relatively lower local sales and higher return and third-country sales. Yet at both aggregate and affiliate levels, the share of local sales in total sales is smaller, while the shares of U.S. and third-country sales are both bigger. These empirical regularities hold when using fixed effects to account for unobserved differences across country-years, sectors, and parent firms. We show theoretically that these patterns are consistent with host-country financial development affecting multinationals’ incentives for FDI through two channels: a financing effect that induces affiliate entry and expansion by improving their access to external finance, and a competition effect that reorients affiliate sales away from the local market due to increased entry by credit-constrained domestic firms.

Keywords: Financial development; Multinational activity; FDI; Heterogeneous firms; Credit constraints (search for similar items in EconPapers)
JEL-codes: F12 F23 F36 G20 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Related works:
Working Paper: Host-Country Financial Development and Multinational Activity (2019)
Working Paper: Host-Country Financial Development and Multinational Activity (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:115:y:2019:i:c:p:192-220

DOI: 10.1016/j.euroecorev.2019.02.008

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