Host Country Financial Development and Mnc Activity

Davin Chor · C. Fritz Foley · Kalina B. Manova · Watt Stanley

22 citations0/0 files storedRePEc: Research Papers in Economics

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International Business and FDI Global trade and economics Global Financial Crisis and Policies

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.

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1998Law and Finance 1999Why do Some Countries Produce So Much More Output Per Worker than Others?1996Financial Dependence and Growth 2004Export Versus FDI with Heterogeneous Firms 2001The nature and growth of vertical specialization in world trade 2003FDI and economic growth: the role of local financial markets 1996Law and Finance 1984A Simple Theory of International Trade with Multinational Corporations

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2014Firm Exports and Multinational Activity Under Credit Constraints 2013The Margins of Multinational Production and the Role of Intrafirm Trade 2015International Trade, Multinational Activity, and Corporate Finance

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