Document Type

Journal Article

Department/Unit

Department of Economics

Title

Foreign Direct Investment and Debt Financing in Emerging Economies

Language

English

Abstract

The rich dynamics of capital flows is an important characteristic of business cycles in emerging market economies. In the data external debt is always procyclical, while FDI is procyclical only in normal times. We provide a microfounded rationale for this pattern by linking financial shocks to capital flows. For this purpose, we build a small open economy model in which firms are subject to borrowing constraints, and are either owned domestically or by foreign investors who purchase firms through FDI. During a financial crisis, the valuation gap per unit net worth between foreign and domestic investors widens, which triggers more FDI inflow. Our model produces business cycle moments consistent with empirical observations.

Keywords

inancial frictions, FDI, debt financing, financial crisis

Publication Date

2019

Source Publication Title

Journal of Money, Credit and Banking

Publisher

Wiley

DOI

10.1111/jmcb.12612

Link to Publisher's Edition

https://doi.org/10.1111/jmcb.12612

ISSN (print)

00222879

ISSN (electronic)

15384616

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