Dynamic Effects of Foreign Direct Investment When Credit Markets are Imperfect

Thomas Gall, Marc Schiffbauer and Julia Kubny

No 5, Proceedings of the German Development Economics Conference, Hannover 2010 from Verein für Socialpolitik, Research Committee Development Economics

Abstract: This paper argues that foreign direct investment in economies with credit market imperfections may increase their vulnerability to capital flow shocks. Due to better access to financial markets foreign firms can use other wage contracts than domestic ones. This alters the domestic wage composition and the subsequent wealth distribution. When credit markets are imperfect, the wealth distribution typically determines an economy's growth potential in autarky; hence, high exposure to foreign direct investment may significantly impede the capability to recover from sudden withdrawals of foreign capital. This is substantiated by empirical evidence on durations of output recovery after systemic sudden stops.

Keywords: Credit market imperfections; foreign direct investment; growth; occupational choice; sudden stops (search for similar items in EconPapers)
JEL-codes: F23 F43 O16 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-dev, nep-ifn and nep-opm
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: DYNAMIC EFFECTS OF FOREIGN DIRECT INVESTMENT WHEN CREDIT MARKETS ARE IMPERFECT (2014)
Working Paper: Dynamic Effects of Foreign Direct Investment When Credit Markets are Imperfect (2009)
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