Working Paper: NBER ID: w23309
Authors: Rodolphe Desbordes; Shangjin Wei
Abstract: This paper empirically investigates the various effects that source and destination countries’ financial development (SFD and DFD respectively) have on foreign direct investment (FDI).We establish causality by exploiting variations in both country-specific financial development and sector-specific financial vulnerability. This approach is made possible by our use of detailed databases on real manufacturing FDI projects worldwide. We find that both SFD and DFD have a large positive influence on greenfield, expansion, and mergers & acquisitions FDI, by directly increasing access to external finance and indirectly promoting manufacturing activity. The overall economic impacts of SFD and DFD tend to be similar but their direct and indirect effects vary across margins and types of FDI.
Keywords: financial development; foreign direct investment; greenfield; mergers and acquisitions
JEL Codes: F21; O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| source financial development (SFD) (O16) | greenfield expansion (F29) |
| destination financial development (DFD) (O19) | greenfield expansion (F29) |
| source financial development (SFD) (O16) | mergers & acquisitions (M&A) FDI (F23) |
| destination financial development (DFD) (O19) | mergers & acquisitions (M&A) FDI (F23) |
| source financial development (SFD) (O16) | access to external finance (O16) |
| destination financial development (DFD) (O19) | access to external finance (O16) |
| source financial development (SFD) (O16) | manufacturing activity (L60) |
| destination financial development (DFD) (O19) | manufacturing activity (L60) |
| access to external finance (O16) | greenfield expansion (F29) |
| access to external finance (O16) | mergers & acquisitions (M&A) FDI (F23) |