Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Crises

Mihir A. Desai, C. Fritz Foley and Kristin Forbes

No 10545, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the effects of financial constraints on firm growth by investigating if large depreciations differentially impact multinational affiliates and local firms in emerging markets. U.S. multinational affiliates increase sales, assets and investment significantly more than local firms during, and subsequent to, currency crises. The enhanced relative performance of multinationals is traced to their ability to use internal capital markets to capitalize on the competitiveness benefits of large depreciations. Investment specifications indicate that increases in leverage resulting from sharp depreciations constrain local firms from capitalizing on these investment opportunities, but do not constrain multinational affiliates. Multinational parents also infuse new capital in their affiliates after currency crises. These results indicate another role for foreign direct investment in emerging markets multinational affiliates expand economic activity during currency crises when local firms are most constrained.

JEL-codes: F23 F31 (search for similar items in EconPapers)
Date: 2004-06
New Economics Papers: this item is included in nep-dev, nep-ifn, nep-mac and nep-mfd
Note: IFM CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

Published as With Mihir A. Desai and Kristin J. Forbes, “Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Depreciations,” Review of Financial Studies, Vol. 21, No. 6, pp. 2857-2888, 2008.

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