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RFS Advance Access originally published online on March 17, 2007
Review of Financial Studies 2008 21(6):2857-2888; doi:10.1093/rfs/hhm017
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© The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org.

Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Depreciations

Mihir A. Desai
Harvard University and NBER

C. Fritz Foley
Harvard University and NBER

Kristin J. Forbes
MIT and NBER

Send correspondence to Mihir A. Desai, Baker 265, Harvard Business School, Boston MA 02163. E-mail: mdesai{at}hbs.edu

JEL Classification: F23, F31, G15, G31, G32


  Abstract

This article examines how financial constraints and product market exposures determine the response of multinational and local firms to sharp depreciations. U.S. multinational affiliates increase sales, assets, and investment significantly more than local firms during, and subsequent to, depreciations. Differing product market exposures do not explain these differences in performance. Instead, a differential ability to circumvent financial constraints is a significant determinant of the observed differences in investment responses. Multinational affiliates also access parent equity when local firms are most constrained. These results indicate another role for foreign direct investment in emerging markets—multinational affiliates expand economic activity during currency crises when local firms are most constrained.

The statistical analysis of firm-level data on U.S. multinational companies was conducted at the International Investment Division, Bureau of Economic Analysis, U.S. Department of Commerce under arrangements that maintain legal confidentiality requirements. The views expressed are those of the authors and do not reflect official positions of the U.S. Department of Commerce. The authors thank Yiorgos Allayannis, Malcolm Baker, Greg Brown, Anusha Chari, Serdar Dinc, Mariassunta Giannetti, Jim Hines, Ross Levine, Michael Schill, Andrei Shleifer, Kathy Terrell, Linda Tesar, Rohan Williamson, Bill Zeile, an anonymous referee, and various seminar and conference participants for helpful comments. Desai and Foley thank the Division of Research at Harvard Business School for financial support.


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