Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Depreciations
Mihir A. Desai
Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)
C. Fritz Foley
Harvard Business School; National Bureau of Economic Research (NBER)
Kristin J. Forbes
Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Bank of England - Monetary Policy Committee
EFA 2004 MAASTRICHT
This paper examines how financial constraints and product market exposures determine the response of multinational and local firms to sharp depreciations. U.S. multinational affiliates increase sales, assets, and investment significantly more than local firms during, and subsequent to, depreciations. Differing product market exposures do not explain these differences in performance. Instead, a differential ability to circumvent financial constraints is a significant determinant of the observed differences in investment responses. Multinational affiliates also access parent equity when local firms are most constrained. These results indicate another role for foreign direct investment in emerging marketsmultinational affiliates expand economic activity during currency crises when local firms are most constrained.
Number of Pages in PDF File: 42
Keywords: Investment, leverage, foreign direct investment, currency crises, financial constraints, depreciations
JEL Classification: F23, F31, G15, G31, G32
Date posted: June 15, 2004
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