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http://ssrn.com/abstract=957338
 
 

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Multinational Firms, FDI Flows and Imperfect Capital Markets


Pol Antras


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

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)

January 2007


Abstract:     
This paper examines how costly financial contracting and weak investor protection influence the cross-border operational, financing and investment decisions of firms. We develop a model in which product developers have a comparative advantage in monitoring the deployment of their technology abroad. The paper demonstrates that when firms want to exploit technologies abroad, multinational firm (MNC) activity and foreign direct investment (FDI) flows arise endogenously when monitoring is nonverifiable and financial frictions exist. The mechanism generating MNC activity is not the risk of technological expropriation by local partners but the demands of external funders who require MNC participation to ensure value maximization by local entrepreneurs. The model demonstrates that weak investor protections limit the scale of multinational firm activity, increase the reliance on FDI flows and alter the decision to deploy technology through FDI as opposed to arm's length licensing. Several distinctive predictions for the impact of weak investor protection on MNC activity and FDI flows are tested and confirmed using firm-level data.

Number of Pages in PDF File: 49

Keywords: Multinational firms, financial frictions, investor protection, licensing, FDI flows

JEL Classification: F21, F23, G32, L24

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Date posted: January 18, 2007  

Suggested Citation

Antras, Pol and Desai, Mihir A. and Foley, C. Fritz, Multinational Firms, FDI Flows and Imperfect Capital Markets (January 2007). Available at SSRN: http://ssrn.com/abstract=957338 or http://dx.doi.org/10.2139/ssrn.957338

Contact Information

Pol Antras
Harvard University - Department of Economics ( email )
Littauer Center
Room 230
Cambridge, MA 02138
United States
617-495-1236 (Phone)
617-495-8570 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Mihir A. Desai
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
C. Fritz Foley (Contact Author)
Harvard Business School ( email )
Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
617-495-6375 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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