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Host Country Financial Development and MNC Activity

Davin Chor ()

No 12-2008, Working Papers from Singapore Management University, School of Economics

Abstract: We present evidence that the level of financial development in FDI recipient countries systematically affects the spatial distribution of multinational corporations' (MNCs) sales. Using detailed proprietary survey data collected by the Bureau of Economic Analysis (BEA) on US multinationalactivity abroad, we find that stronger financial development in the host country has a negative effect on the share of MNC affiliate sales that remain in the host country, indicating a reduced propensity towards horizontal FDI. Conversely, the share of affiliate sales that is re-exported to third-country destinations increases, suggesting an increased propensity towards export-platform FDI. We provide a three-country model with heterogenous firms that rationalizes these observations: More financially developed host countries foster entry by domestic firms, making the local market more competitive for MNC products. This leads MNCs to orient their affiliates away from servicing the local market towards third-country markets instead.

Keywords: Credit constraints; horizontal FDI; vertical FDI; export-platform FDI; heterogenous ¯rms. (search for similar items in EconPapers)
JEL-codes: F12 F23 G20 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2008-10
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Published in SMU Economics and Statistics Working Paper Series

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