Working Paper: CEPR ID: DP13557
Authors: Kamran Bilir; Davin Chor; Kalina Manova
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: financial development; multinational activity; FDI; heterogeneous firms; credit constraints
JEL Codes: F12; F23; F36; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Host-country financial development (O16) | Entry of multinational affiliates (F23) |
| Host-country financial development (O16) | Aggregate affiliate sales (C43) |
| Host-country financial development (O16) | Operational capacity of affiliates (D25) |
| Host-country financial development (O16) | Reorientation of multinational affiliates' sales towards exports (F23) |
| Improving financial conditions (10th to 90th percentile) (G59) | Increase in the number of multinational subsidiaries (F23) |
| Improving financial conditions (10th to 90th percentile) (G59) | Increase in aggregate sales (Q11) |