Multinational corporations (MNCs) manage complex operations, often blending features of three modes of FDI that are well understood in isolation but not in tandem, namely: horizontal, vertical and export-platform FDI. We develop a three-country model with heterogeneous ﬁrms, in order to analyze how ﬁnancing constraints in the FDI host country aﬀect the relative strength of these three motives for FDI. In our model, ﬁnancial development in the host country fosters entry by domestic ﬁrms, making the local market more competitive for MNC products. This leads MNCs to orient their aﬃliate sales away from the local market toward other markets instead. These predictions ﬁnd strong conﬁrmation in detailed data on the activities of U.S. multinationals abroad. We ﬁnd that MNC aﬃliates in hosts with more mature ﬁnancial markets: (i) channel a smaller share of their sales to the local market; (ii) send a bigger share of their sales back to the U.S., as well as to third-country destinations; and that (iii) these eﬀects of host country ﬁnancial development appear to be mediated through the entry of establishments in the local economy.
Credit constraints, horizontal FDI, vertical FDI, export-platform FDI, heterogenous firms.
Finance | International Economics
BILIR, L. Kamran; CHOR, Davin; and KALINA, Manova.
Host Country Financial Development and MNC Activity. (2013). 1-54. Research Collection School Of Economics.
Available at: https://ink.library.smu.edu.sg/soe_research/953
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