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Host-Country Financial Development and Multinational Activity

work, Entrepreneurship, and finance

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.

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Author(s)
Kalina Manova
L. Kamran Biliry
Davin Chor
Publication Date
August, 2014