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Host-Country Financial Development and Multinational Activity

Bilir, K; Chor, D; Manova, K; (2019) Host-Country Financial Development and Multinational Activity. European Economic Review , 115 pp. 192-220. 10.1016/j.euroecorev.2019.02.008. Green open access

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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.

Type: Article
Title: Host-Country Financial Development and Multinational Activity
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.euroecorev.2019.02.008
Publisher version: https://doi.org/10.1016/j.euroecorev.2019.02.008
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: Financial development, multinational activity, FDI, heterogeneous firms, credit constraints
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10069058
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