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

42 Pages Posted: 15 Jun 2004

See all articles by Mihir A. Desai

Mihir A. Desai

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

C. Fritz Foley

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

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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—multinational 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)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

C. Fritz Foley

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
617-495-6375 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kristin J. Forbes

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

Room E62-416
Cambridge, MA 02142
United States
617-253-8996 (Phone)

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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,273
Abstract Views
9,754
Rank
33,561
PlumX Metrics