Financial Frictions, Foreign Direct Investment, and Growth

Luis San Vicente Portes

No 41, FIW Working Paper series from FIW

Abstract: This paper assesses the role of financial frictions and Foreign Direct Investment (FDI) on an economy´s growth rate, business cycle volatility, and firm´s capital structure. We gauge these effects within the Financial Accelerator framework, where entrepreneurs can establish affiliates of local firms abroad through Foreign Direct Investment. Model simulations suggest that in the presence of credit market imperfections FDI is associated with faster growth, less leverage, and lower aggregate volatility. These features are consistent with the macroeconomic dynamics of the more globally integrated economies over the last three decades.

Keywords: Output volatility; Foreign Direct Investment; International Diversification; Capital Structure (search for similar items in EconPapers)
JEL-codes: E32 F43 G32 (search for similar items in EconPapers)
Pages: 32
Date: 2010-01
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Persistent link: https://EconPapers.repec.org/RePEc:wsr:wpaper:y:2010:i:041

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