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Dynamic Effects of Foreign Direct Investment When Credit Markets are Imperfect

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  • Gall, Thomas
  • Schiffbauer, Marc
  • Kubny, Julia

Abstract

This paper argues that foreign direct investment in economies with credit market imperfections may increase their vulnerability to capital flow shocks. Due to better access to financial markets foreign firms can use other wage contracts than domestic 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 foreign direct investment may significantly impede the capability to recover from sudden withdrawals of foreign capital. This is substantiated by empirical evidence on durations of output recovery after systemic sudden stops.

Suggested Citation

  • Gall, Thomas & Schiffbauer, Marc & Kubny, Julia, 2010. "Dynamic Effects of Foreign Direct Investment When Credit Markets are Imperfect," Proceedings of the German Development Economics Conference, Hannover 2010 5, Verein für Socialpolitik, Research Committee Development Economics.
    • Handle: RePEc:zbw:gdec10:5
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    References listed on IDEAS

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    1. Luiz R. de Mello Jr., 1997. "Foreign Direct Investment in Developing Countries: A Selective Survey," Studies in Economics 9701, School of Economics, University of Kent.
    2. Koen De Backer & Leo Sleuwaegen, 2003. "Does Foreign Direct Investment Crowd Out Domestic Entrepreneurship?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 22(1), pages 67-84, February.
    3. David Mayer‐Foulkes & Peter Nunnenkamp, 2009. "Do Multinational Enterprises Contribute to Convergence or Divergence? A Disaggregated Analysis of US FDI," Review of Development Economics, Wiley Blackwell, vol. 13(2), pages 304-318, May.
    4. Balcao Reis, Ana, 2001. "On the welfare effects of foreign investment," Journal of International Economics, Elsevier, vol. 54(2), pages 411-427, August.
    5. Luiz de Mello, 1997. "Foreign direct investment in developing countries and growth: A selective survey," Journal of Development Studies, Taylor & Francis Journals, vol. 34(1), pages 1-34.
    6. Reis, Ana Balcao, 2006. "Welfare, taxes and foreign investment," Journal of Economic Dynamics and Control, Elsevier, vol. 30(6), pages 1045-1061, June.
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    Cited by:

    1. Burger, Martijn J. & Ianchovichina, Elena I., 2014. "Surges and stops in FDI flows to developing countries : does the mode of entry make a difference ?," Policy Research Working Paper Series 6771, The World Bank.
    2. Chen, George S. & Yao, Yao & Malizard, Julien, 2017. "Does foreign direct investment crowd in or crowd out private domestic investment in China? The effect of entry mode," Economic Modelling, Elsevier, vol. 61(C), pages 409-419.
    3. Ronald B. Davies & Michael J. Lamla & Marc Schiffbauer, 2016. "Learning or Leaning: Persistent and Transitory Spillovers from FDI," KOF Working papers 16-399, KOF Swiss Economic Institute, ETH Zurich.
    4. Yazdani , Mahdi & Daryani , Elmira, 2021. "Output Loss from Sudden Stop of FDI and the Role of Macroeconomic Policies," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 16(2), pages 213-236, June.
    5. Davies,Ronald B. & Lamla,Michael Josef & Schiffbauer,Marc Tobias, 2016. "Learning or leaning : persistent and transitory growth spillovers from FDI," Policy Research Working Paper Series 7591, The World Bank.
    6. Yao Yao & Ruhul Salim, 2020. "Crowds in or crowds out? The effect of foreign direct investment on domestic investment in Chinese cities," Empirical Economics, Springer, vol. 58(5), pages 2129-2154, May.
    7. Duong, Tran Lam Anh, 2013. "An Analysis of Changes in Wealth Distribution upon the Entrance of Foreign Direct Investment Firms," Discussion Papers 2013-09, Graduate School of Economics, Hitotsubashi University.

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    More about this item

    Keywords

    Credit market imperfections; foreign direct investment; growth; occupational choice; sudden stops;
    All these keywords.

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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