The (Non-)Resiliency of Foreign Direct Investment in the United States During the 2007-2009 Financial Crisis
Federal Reserve Bank of St. Louis
Pierangelo De Pace
Pomona College - Department of Economics
December 30, 2011
Federal Reserve Bank of St. Louis Working Paper No. 2011-037B
We study the contraction of foreign direct investment (FDI) flows in the United States during the recent financial crisis and show their unusual non-resiliency, which depends in part on the global nature of the economic recession, but also on the increases in the cost of financing FDI in the economies in which the flows originate. To formally study the effects of external financial conditions on FDI in the United States, we exploit the three dimensions of a panel of U.S. inward FDI flows organized by recipient U.S. industries, source countries, and years for the recorded flows. Changes in the cost of finance in the source countries have little or no effect on total inward flows (the sum of equity, debt, and reinvested earnings) over the 2006-2010 period. However, U.S. industries characterized by more financial vulnerability experience statistically significant variations in the debt and equity components of inward FDI flows in response to the changes in the cost of capital that occurred in the source countries during the crisis.
Number of Pages in PDF File: 30
Keywords: Capital Flows, Financial Crisis, FDI, Cost of Finance
JEL Classification: F21, F23, F32, F36, G01
Date posted: April 12, 2012
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