Host-Country Financial Development and Multinational Activity

55 Pages Posted: 7 Mar 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: February 2019

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: credit constraints, FDI, Financial Development, Heterogeneous Firms, multinational activity

JEL Classification: F12, F23, F36, G20

Suggested Citation

Bilir, Kamran and Chor, Davin and Manova, Kalina B., Host-Country Financial Development and Multinational Activity (February 2019). CEPR Discussion Paper No. DP13557. Available at SSRN: https://ssrn.com/abstract=3346347

Kamran Bilir (Contact Author)

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

University College London - Department of Economics ( email )

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

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