Hostname: page-component-cd9895bd7-fscjk Total loading time: 0 Render date: 2024-12-28T05:51:02.851Z Has data issue: false hasContentIssue false
  • English
  • Français

DYNAMIC EFFECTS OF FOREIGN DIRECT INVESTMENT WHEN CREDIT MARKETS ARE IMPERFECT

Published online by Cambridge University Press:  03 July 2013

Thomas Gall ,
Marc Schiffbauer  and
Julia Kubny
Thomas Gall*
Affiliation:
University of Bonn
Marc Schiffbauer
Affiliation:
World Bank
Julia Kubny
Affiliation:
German Development Institute/Deutsches Institut für Entwicklungspolitik (DIE)
*
Address correspondence to: Thomas Gall, Economics Division, School of Social Sciences, University of Southampton, Southampton SO17 1BJ, UK; e-mail: t.gall@soton.ac.uk.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper argues that foreign direct investment (FDI) may increase the vulnerability to capital flow shocks of economies with credit market imperfections. Because of worse access to financial markets, wages in domestic firms carry higher default risk than wages in foreign ones. This alters the domestic wage composition and the subsequent wealth distribution. When credit markets are imperfect, the wealth distribution typically determines an economy's growth potential in autarky; hence, high exposure to FDI may significantly impede the capability to recover from sudden withdrawals of foreign capital. This appears consistent with a first glance at empirical evidence on durations of output recovery after systemic sudden stops.

Keywords

Credit Market ImperfectionsForeign Direct InvestmentInequalityGrowthOccupational ChoiceSudden Stops
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 8 , December 2014 , pp. 1797 - 1831
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Abiad, Abdul, Dell'Ariccia, Giovanni, and Li, Bin (2011) Creditless Recoveries. Working paper WP/11/58, International Monetary Fund.CrossRefGoogle Scholar
Acharya, Viral V., Amihud, Yakov, and Litov, Lubomir (2009) Creditor Rights and Corporate Risk-Taking. Working paper 15569, NBER.Google Scholar
Ahlin, Christian and Jiang, Neville (2008) Can micro-credit bring development? Journal of Development Economics 86, 1–21.CrossRefGoogle Scholar
Aitken, Brian J. and Harrison, Ann E. (1999) Do domestic firms benefit from direct foreign investment? Evidence from Venezuela. American Economic Review 89 (3), 605–618.Google Scholar
Aitken, Brian J., Harrison, Ann E., and Lipsey, Robert E. (1996) Wages and foreign ownership: A comparative study of Mexico, Venezuela, and the United States. Journal of International Economics 42, 345–371.Google Scholar
Alfaro, Laura, Chanda, Areendam, Kalemli-Ozcan, Sebnem, and Sayek, Selin (2004) FDI and economic growth: The role of local financial markets. Journal of International Economics 64, 89–112.CrossRefGoogle Scholar
Alfaro, Laura and Chen, Maggie X. (2011) Surviving the Global Financial Crisis: Foreign Ownership and Establishment Performance. Policy Research Paper 5946, World Bank.Google Scholar
Balcão Reis, Ana (2001) Welfare effects of foreign investment. Journal of International Economics 54, 411–427.Google Scholar
Banerjee, Abhijit V. and Newman, Andrew F. (1993) Occupational choice and the process of development. Journal of Political Economy 101 (2), 274–298.Google Scholar
Borensztein, Eduardo, De Gregorio, Jose, and Lee, Jong-Wha (1998) How does foreign direct investment affect economic growth? Journal of International Economics 45, 115–135.Google Scholar
Calvo, Guillermo A., Izquierdo, Alejandro, and Talvi, Ernesto (2006) Sudden stops and phoenix miracles in emerging markets. American Economic Review 96 (2), 405–410.CrossRefGoogle Scholar
Choi, Changkyu (2006) Does foreign direct investment affect domestic income inequality? Applied Economics Letters 13, 811–814.Google Scholar
Coricelli, Fabrizio and Roland, Isabelle (2011) How Do Credit Conditions Shape Economic Recoveries? Discussion paper 8325, Centre for Economic Policy Research.Google Scholar
Cowan, Kevin and Raddatz, Claudio (2011) Sudden Stops and Financial Frictions. Policy Research Working Paper 5605, World Bank.Google Scholar
De Backer, Koen and Sleuwaegen, Leo (2003) Does foreign direct investment crowd out domestic entrepreneurship? Review of Industrial Organization 22 (1), 67–84.CrossRefGoogle Scholar
De Mello, Luiz R. (1997) Foreign direct investment in developing countries: A selective survey. Journal of Development Studies 34, 1–34.Google Scholar
Djankov, Simeon, McLiesh, Caralee, and Shleifer, Andrei (2007) Private credit in 129 countries. Journal of Financial Economics 84 (2), 299–329.Google Scholar
Dollar, David and Kraay, Aart (2003) Institutions, trade, and growth. Journal of Monetary Economics 50 (1), 133–162.Google Scholar
Feenstra, Robert C. and Hanson, Gordon H. (1997) Foreign direct investment and relative wages: Evidence from Mexico's maquiladoras. Journal of International Economics 42, 371–393.Google Scholar
Fosfuri, Andrea, Motta, Massimo, and Rønde, Thomas (2001) Foreign direct investment and spillovers through workers' mobility. Journal of International Economics 53, 205–222.Google Scholar
Gall, Thomas (2008) Lotteries, inequality, and market imperfection: Galor and Zeira go gambling. Economic Theory 34 (2), 359–382.Google Scholar
Gall, Thomas (2010) Inequality, incomplete contracts, and the size distribution of business firms. International Economic Review 51 (2), 335–364.Google Scholar
Gallego, Francisco A. and Tessada, José A. (2012) Sudden stops, financial frictions, and labor market flows: Evidence from Latin America. Journal of Development Economics 97, 257–268.Google Scholar
Galor, Oded and Zeira, Joseph (1993) Income distribution and macroeconomics. Review of Economic Studies 60, 35–52.CrossRefGoogle Scholar
Ghatak, Maitreesh, Morelli, Massimo, and Sjöström, Tomas (2001) Occupational choice and dynamic incentives. Review of Economic Studies 68, 781–810.Google Scholar
Grossman, Gene M. (1984) International trade, foreign investment, and the formation of the entrepreneurial class. American Economic Review 74 (4), 605–614.Google Scholar
Guiso, Luigi, Pistaferri, Luigi, and Schivardi, Fabiano (2013) Credit within the firm. Review of Economic Studies 80 (1), 211–247.Google Scholar
Heston, Alan, Summers, Robert, and Aten, Barbara (2006) Penn World Table Version 6.2. Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania.Google Scholar
International Monetary Fund (2010). How did Emerging Markets Cope in the Crisis? Mimeo, International Monetary Fund.Google Scholar
Jaimovich, Esteban (2010) Adverse selection and entrepreneurship in a model of development. Scandinavian Journal of Economics 112 (1), 77–100.Google Scholar
Javorcik, Beata S. (2004) Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages. American Economic Review 94 (3), 605–627.Google Scholar
La Porta, Rafael, Lopez-de-Silanes, Florencio, Shleifer, Andrei, and Vishny, Robert W. (1998) Law and finance. Journal of Political Economy 106 (6), 1113–1155.Google Scholar
Levchenko, Andrei A. and Mauro, Paolo (2007) Do some forms of financial flows help protect against “sudden stops”? World Bank Economic Review 21 (3), 389–411.Google Scholar
Li, Jiatao and Guisinger, Stephen (1991) Comparative business failures of foreign-controlled firms in the United States. Journal of International Business Studies 22 (2), 209–224.Google Scholar
Lipsey, Robert E. and Sjöholm, Fredrik (2004) Foreign direct investment, education and wages in Indonesian manufacturing. Journal of Development Economics 73, 415–422.Google Scholar
Lucas, Robert E. (1990) Why doesn't capital flow from rich to poor countries? American Economic Review 80 (2), 92–96.Google Scholar
Manova, Kalina, Wei, Shang-Jin, and Zhang, Zhiwei (2012) Firm Exports and Multinational Activity under Credit Constraints. Working paper 16905, NBER.Google Scholar
Maoz, Yishay D. and Moav, Omer (2004) Social stratification, capital-skill complementarity, and the nonmonotonic evolution of the education premium. Macroeconomic Dynamics 8, 295–309.Google Scholar
Markusen, James R. and Venables, Anthony J. (1999) Foreign direct investment as a catalyst for industrial development. European Economic Review 43 (2), 335–356.Google Scholar
Mata, José and Portugal, Pedro (2004) Patterns of entry, post-entry growth, and survival. Small Business Economics 22, 283–298.Google Scholar
Matsuyama, Kiminori (2004) Financial globalization, symmetry breaking and endogenous inequality of nations. Econometrica 72 (3), 853–884.Google Scholar
Tsai, Pan-Long (1995) Foreign direct investment and income inequality: Further evidence. World Development 23, 469–483.Google Scholar
UNCTAD (2007) World Investment Report 2007. Geneva: United Nations Publications.Google Scholar
Zeng, Zheng (in press) Credit market frictions and firm dynamics. Macroeconomic Dynamics.Google Scholar