Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Depreciations

42 Pages Posted: 15 Jun 2004  

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

C. Fritz Foley

Harvard Business School; National Bureau of Economic Research (NBER)

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Bank of England - Monetary Policy Committee

Multiple version iconThere are 2 versions of this paper

Date Written: June 2006

Abstract

This paper examines how financial constraints and product market exposures determine the response of multinational and local firms to sharp depreciations. U.S. multinational affiliates increase sales, assets, and investment significantly more than local firms during, and subsequent to, depreciations. Differing product market exposures do not explain these differences in performance. Instead, a differential ability to circumvent financial constraints is a significant determinant of the observed differences in investment responses. Multinational affiliates also access parent equity when local firms are most constrained. These results indicate another role for foreign direct investment in emerging markets¬ómultinational affiliates expand economic activity during currency crises when local firms are most constrained.

Keywords: Investment, leverage, foreign direct investment, currency crises, financial constraints, depreciations

JEL Classification: F23, F31, G15, G31, G32

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Forbes, Kristin J., Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Depreciations (June 2006). EFA 2004 MAASTRICHT. Available at SSRN: https://ssrn.com/abstract=548782 or http://dx.doi.org/10.2139/ssrn.548782

Mihir A. Desai (Contact Author)

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C. Fritz Foley

Harvard Business School ( email )

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National Bureau of Economic Research (NBER)

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Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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HOME PAGE: http://web.mit.edu/kjforbes/www

National Bureau of Economic Research (NBER)

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