Foreign Direct Investment and External Financing Conditions: Evidence from Normal and Crisis Times
38 Pages Posted: 31 Oct 2017
Date Written: October 2017
In this paper, we investigate the effects that external financing conditions in source and destination countries have on foreign direct investment (FDI) in normal and crisis times, using a difference‐in‐differences approach. We find that the financial development of the source and destination countries has a strong positive impact on the relative volume of FDI in financially vulnerable sectors in normal times. However, during the 2008–2010 global financial crisis, the relative volume of FDI in financially vulnerable sectors fell relatively more in financially developed source and destination countries, most notably if these countries experienced a credit crisis.
Keywords: Banking crisis, credit constraints, credit crisis, financial development, foreign direct investment, global financial crisis
JEL Classification: F23, O16
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