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Host-Country Financial Development and Multinational Activity

Aug 2014
Working Paper
521
Kalina Manova, L. Kamran Biliry, Davin Chor

We establish that host-country financial development affects the global operations of multinational firms. Using detailed U.S. data, we provide robust evidence that host-country financial development attracts more entry by multinational affiliates, while also influencing affiliates’ incentives to sell in the local market, versus to their parent country and third-country destinations. We rationalize these patterns with a model that highlights two effects of financial development: 1) a competition effect that reduces affiliate revenues in the host market due to increased entry by domestic firms, and 2) a financing effect that encourages affiliate entry by easing borrowing constraints in the host country.

Publication Keywords: 
Credit Constraints
Financial Development
Multinational Activity
FDI
Heterogeneous Firms
Geographic Regions: