NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Mihir A. Desai, C. Fritz Foley, Kristin J. Forbes

NBER Working Paper No. 10545
Issued in June 2004
NBER Program(s):   IFM   CF

This paper studies the effects of financial constraints on firm growth by investigating if large depreciations differentially impact multinational affiliates and local firms in emerging markets. U.S. multinational affiliates increase sales, assets and investment significantly more than local firms during, and subsequent to, currency crises. The enhanced relative performance of multinationals is traced to their ability to use internal capital markets to capitalize on the competitiveness benefits of large depreciations. Investment specifications indicate that increases in leverage resulting from sharp depreciations constrain local firms from capitalizing on these investment opportunities, but do not constrain multinational affiliates. Multinational parents also infuse new capital in their affiliates after currency crises. 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.

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Document Object Identifier (DOI): 10.3386/w10545

Published: With Mihir A. Desai and Kristin J. Forbes, “Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Depreciations,” Review of Financial Studies, Vol. 21, No. 6, pp. 2857-2888, 2008.

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