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

42 Pages Posted: 18 Jun 2004 Last revised: 30 Aug 2009

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 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)

Date Written: June 2004

Abstract

This paper studies the effects of financial constraints on firm growth by investigating if large depreciations differentially impact multinational affiliates and local firms in emerging markets. U.S. multinational affiliates increase sales, assets and investment significantly more than local firms during, and subsequent to, currency crises. The enhanced relative performance of multinationals is traced to their ability to use internal capital markets to capitalize on the competitiveness benefits of large depreciations. Investment specifications indicate that increases in leverage resulting from sharp depreciations constrain local firms from capitalizing on these investment opportunities, but do not constrain multinational affiliates. Multinational parents also infuse new capital in their affiliates after currency crises. 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.

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Forbes, Kristin J., Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Crises (June 2004). NBER Working Paper No. w10545. Available at SSRN: https://ssrn.com/abstract=556532

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)

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C. Fritz Foley

Harvard Business School ( email )

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

National Bureau of Economic Research (NBER)

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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)

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Cambridge, MA 02138
United States

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