Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance

44 Pages Posted: 12 Jun 2010

See all articles by Laura Alfaro

Laura Alfaro

Harvard University

Maggie Xiaoyang Chen

George Washington University

Date Written: June 11, 2010

Abstract

We examine in this paper the differential response of establishments to the global financial crisis, with particular emphasis on the role of foreign direct investment (FDI) in determining micro economic performance. Using a new worldwide dataset that reports the activities of more than 12 million establishments before and after 2008, we investigate how multinationals around the world responded to the crisis relative to local firms. We explore three distinct channels through which FDI affects establishment performance, (i) production linkages, (ii) financial linkages, and (iii) multinational networks. Our analysis shows that while multinational owned establishments performed, on average, better than their local competitors, there is considerable heterogeneity in the role of FDI. First, multinationals located in countries that experienced sharper declines in aggregate output, demand, and credit conditions displayed a greater advantage over local firms. Multinationals headquartered in countries with a greater incidence of the crisis, in contrast, fared less satisfactorily abroad. Second, multinationals that engaged in activities with vertical production linkages or stronger financial constraints exhibited particularly better responses compared to local firms. Finally, being part of a larger multinational network also led to superior economic performance.

Keywords: Global Financial Crisis, Establishment Response, Foreign Direct Investment, Production Linkage, Financial Linkage, Network

JEL Classification: F2, F1

Suggested Citation

Alfaro, Laura and Chen, Maggie Xiaoyang, Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance (June 11, 2010). Harvard Business School BGIE Unit Working Paper No. 10-110. Available at SSRN: https://ssrn.com/abstract=1623831 or http://dx.doi.org/10.2139/ssrn.1623831

Laura Alfaro (Contact Author)

Harvard University ( email )

Cambridge, MA 02138
United States

Maggie Xiaoyang Chen

George Washington University ( email )

710 21st Street NW
Washington, DC 20052
United States

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