Finance and foreign direct investment

Rahul Mukherjee

Chapter 12 in Elgar Encyclopedia of International Trade, 2026, pp 53-57 from Edward Elgar Publishing

Abstract: This entry examines the interplay between finance and foreign direct investment, focusing on how financial factors influence both the timing and nature of cross-border investment. Large-scale FDI projects are sensitive to internal liquidity, external borrowing costs, and firm valuations, with evidence that valuation swings—particularly during domestic financial crises—can trigger “fire-sale” acquisitions providing liquidity to financially constrained targets. Beyond cyclical effects, differences in financial development across source and host countries shape long-term FDI patterns. In environments with weak investor protection, multinationals may take larger equity stakes to reassure external investors, thereby committing greater greenfield funds. Sovereign wealth funds contribute to FDI but may be constrained by governance and political factors. Finally, FDI alters corporate risk profiles, with financial markets generally pricing foreign ventures as riskier than domestic ones.

Keywords: Foreign direct investment; Corporate finance; Financial constraints; Valuation effects; Financial development (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035327492
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