Publications
- Multinational Firms, FDI Flows and Imperfect Capital Markets
- Download: PDF 447.79 KB
- by Desai, Mihir A.; Antràs, Pol; Foley, C. Fritz
- This paper examines how costly financial contracting and weak investor protection
influence the cross-border operational, financing and investment decisions
of firms. We develop a model in which product developers have a comparative
advantage in monitoring the deployment of their technology abroad. The paper
demonstrates that when firms want to exploit technologies abroad, multinational
firm (MNC) activity and foreign direct investment (FDI) flows arise endogenously
when monitoring is nonverifiable and financial frictions exist. The mechanism generating
MNC activity is not the risk of technological expropriation by local partners
but the demands of external funders who require MNC participation to ensure value
maximization by local entrepreneurs. The model demonstrates that weak investor
protections limit the scale of multinational firm activity, increase the reliance on
FDI flows and alter the decision to deploy technology through FDI as opposed to
arm’s length licensing. Several distinctive predictions for the impact of weak investor
protection on MNC activity and FDI flows are tested and confirmed using
firm-level data.
- Publication Type: WCFIA Working Paper
- Published Date: January 2007
- Field of Interest: International Economics
- Desai, Mihir, P. Antràs, and C.F. Foley. "Multinational Firms, FDI Flows and Imperfect Capital Markets." Working Paper 2008-0019, Weatherhead Center for International Affairs, Harvard University, January 2007.
- Also NBER Working Paper No. 12855.
