Multinational Firms, FDI Flows, and Imperfect Capital Markets

Pol Antràs, Mihir A. Desai and C. Fritz Foley
Additional contact information
Pol Antràs: Harvard University and NBER.
Mihir A. Desai: Harvard Business School and NBER.
C. Fritz Foley: Harvard Business School and NBER.

The Quarterly Journal of Economics, 2009, vol. 124, issue 3, pages 1171-1219

Abstract: This paper examines how costly financial contracting and weak investor protection influence the cross-border operational, financing, and investment decisions of firms. We develop a model in which product developers can play a useful role in monitoring the deployment of their technology abroad. The analysis demonstrates that when firms want to exploit technologies abroad, multinational firm (MNC) activity and foreign direct investment (FDI) flows arise endogenously when monitoring is nonverifiable and financial frictions exist. 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 demonstrates that weak investor protections limit the scale of MNC activity, increase the reliance on FDI flows, and alter the decision to deploy technology through FDI as opposed to arm's length technology transfers. Several distinctive predictions for the impact of weak investor protection on MNC activity and FDI flows are tested and confirmed using firm-level data. (c) 2009 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

Date: 2009

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