Working Paper: NBER ID: w10545
Authors: Mihir A. Desai; C. Fritz Foley; Kristin J. Forbes
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.
Keywords: Financial Constraints; Growth; Multinational Firms; Local Firms; Currency Crises
JEL Codes: F23; F31; G15; G31; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| large depreciations (F31) | greater increases in sales for multinational affiliates (F23) |
| large depreciations (F31) | greater increases in assets for multinational affiliates (F23) |
| large depreciations (F31) | higher capital expenditures for multinational affiliates (F23) |
| currency crises (F31) | financial constraints for local firms (G32) |
| financial constraints for local firms (G32) | hindered investment opportunities (F64) |
| multinational parents (F23) | additional capital to affiliates post-crisis (F65) |
| foreign direct investment (F23) | mitigate adverse effects of currency crises for multinational affiliates (F31) |