Host-country financial development and multinational activity

Author / Creator

Bilir, L. Kamran

Available as

Online

Summary

We provide evidence that host-country financial development affects the global operations of multinational firms. Financially advanced economies attract more affiliates of U.S. multinationals. Fina...

We provide evidence that host-country financial development affects the global operations of multinational firms. Financially advanced economies attract more affiliates of U.S. multinationals. Financially developed host countries also feature higher aggregate affiliate sales to the local market, the United States and third-country destinations. By contrast, individual affiliates in such hosts sell more to the United States and other markets, but less locally. Yet, the share of local sales in total affiliate sales falls with host-country financial development both at the affiliate and aggregate levels, while the shares of U.S. and third-country sales increase. These results are amplified in sectors that depend more on the financial system for external capital. We rationalize these empirical patterns with a three-country model of multinational activity under imperfect financial markets. The data are consistent with two effects of financial development highlighted by the model: 1) a competition effect that reduces affiliates' local revenues due to increased domestic firm entry; and 2) a financing effect that encourages affiliate entry by easing borrowing constraints in the host country.

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