Host Country Financial Development and Multinational Activity

51 Pages Posted: 28 Feb 2013 Last revised: 28 Feb 2019

See all articles by Kamran Bilir

Kamran Bilir

University of Wisconsin - Madison - Department of Economics

Davin Chor

Dartmouth College - Tuck School of Business; National University of Singapore (NUS) - Department of Economics

Kalina Manova

University College London - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: November 30, 2018

Abstract

This paper evaluates the influence of host-country financial conditions on the global operations of multinational firms. Using detailed U.S. data, we establish that financial development in a country is associated with relatively more entry by multinational affiliates, as well as with higher aggregate affiliate sales to the local market, back to the U.S. and to third destinations, with these effects being more pronounced in financially more vulnerable sectors. At the level of individual affiliates, by contrast, these forces are associated with relatively lower local sales and higher return and third-country sales. Yet at both aggregate and affiliate levels, the share of local sales in total sales is smaller, while the shares of U.S. and third-country sales are both bigger. These empirical regularities hold when using fixed effects to account for unobserved differences across country-years, sectors, and parent firms. We show theoretically that these patterns are consistent with host-country financial development affecting multinationals' incentives for horizontal, vertical and platform FDI through two channels: a financing effect that induces affiliate entry and expansion by improving their access to external finance, and a competition effect that reorients affiliate sales away from the local market due to increased entry by credit-constrained domestic firms.

Keywords: Financial development, multinational activity, FDI, heterogeneous firms, credit constraints

JEL Classification: F12, F23, F36, G20

Suggested Citation

Bilir, Kamran and Chor, Davin and Manova, Kalina B., Host Country Financial Development and Multinational Activity (November 30, 2018). European Economic Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2225943 or http://dx.doi.org/10.2139/ssrn.2225943

Kamran Bilir

University of Wisconsin - Madison - Department of Economics ( email )

Madison, WI 53706
United States

Davin Chor

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National University of Singapore (NUS) - Department of Economics ( email )

1 Arts Link, AS2 #06-02
Singapore 117570, Singapore 119077
Singapore

Kalina B. Manova (Contact Author)

University College London - Department of Economics ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

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