How Do Foreign Investors Impact Domestic Economic Activity? Evidence from China and India

49 Pages Posted: 17 Nov 2012 Last revised: 11 Sep 2013

See all articles by Chotibhak Jotikasthira

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Date Written: February 20, 2013

Abstract

There has been renewed advocacy for restrictions on international financial flows in the wake of the recent financial crisis. Motivated by this trend, we explore the extent to which cross-border flows affect real economic activity. Unlike previous research efforts that focus on aggregated capital flows, we exploit novel data on forced trading by global mutual funds as a plausible source of exogenous flow shocks. Such forced trading is known to generate large liquidity and price effects, but its real impacts have not been studied extensively. We find that both country- and firm-level investment growth rates are significantly affected by these exogenous capital shocks, and that their effect is more pronounced for firms whose marginal investment decisions are more equity-reliant.

Keywords: capital flows, forced trading, fire sales, mutual funds, liquidity, investment, growth

JEL Classification: F32, G12, G15

Suggested Citation

Jotikasthira, Chotibhak and Lundblad, Christian T. and Ramadorai, Tarun, How Do Foreign Investors Impact Domestic Economic Activity? Evidence from China and India (February 20, 2013). UNC Kenan-Flagler Research Paper No. 2013-21. Available at SSRN: https://ssrn.com/abstract=2176217 or http://dx.doi.org/10.2139/ssrn.2176217

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department ( email )

United States

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

Tarun Ramadorai (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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