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Dynamic effects of foreign direct investment when credit markets are imperfect

Dynamic effects of foreign direct investment when credit markets are imperfect
Dynamic effects of foreign direct investment when credit markets are imperfect
This paper argues that foreign direct investment (FDI) may increase the vulnerability to capital flow shocks of economies with credit market imperfections. Because of worse access to financial markets, wages in domestic firms carry higher default risk than wages in foreign ones. This alters the domestic wage composition and the subsequent wealth distribution. When credit markets are imperfect, the wealth distribution typically determines an economy’s growth potential in autarky; hence, high exposure to FDI may significantly impede the capability to recover from sudden withdrawals of foreign capital. This appears consistent with a first glance at empirical evidence on durations of output recovery after systemic sudden stops.
credit market imperfections, foreign direct investment, inequality, growth, occupational choice, sudden stops
1365-1005
1-35
Gall, Thomas
8df67f3d-fe3c-4a3f-8ce7-e2090557fcd4
Schiffbauer, Marc
5eedb827-5796-4033-8022-30524a15f6f7
Kubny, Julia
e08bfad0-a64d-475a-844d-43174039e0f9
Gall, Thomas
8df67f3d-fe3c-4a3f-8ce7-e2090557fcd4
Schiffbauer, Marc
5eedb827-5796-4033-8022-30524a15f6f7
Kubny, Julia
e08bfad0-a64d-475a-844d-43174039e0f9

Gall, Thomas, Schiffbauer, Marc and Kubny, Julia (2013) Dynamic effects of foreign direct investment when credit markets are imperfect. Macroeconomic Dynamics, n/a, 1-35. (doi:10.1017/S1365100513000175).

Record type: Article

Abstract

This paper argues that foreign direct investment (FDI) may increase the vulnerability to capital flow shocks of economies with credit market imperfections. Because of worse access to financial markets, wages in domestic firms carry higher default risk than wages in foreign ones. This alters the domestic wage composition and the subsequent wealth distribution. When credit markets are imperfect, the wealth distribution typically determines an economy’s growth potential in autarky; hence, high exposure to FDI may significantly impede the capability to recover from sudden withdrawals of foreign capital. This appears consistent with a first glance at empirical evidence on durations of output recovery after systemic sudden stops.

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More information

e-pub ahead of print date: 3 July 2013
Keywords: credit market imperfections, foreign direct investment, inequality, growth, occupational choice, sudden stops
Organisations: Economics

Identifiers

Local EPrints ID: 348657
URI: https://eprints.soton.ac.uk/id/eprint/348657
ISSN: 1365-1005
PURE UUID: b418e01d-7ea2-425b-8a2d-9fe7b2e2ba9a
ORCID for Thomas Gall: ORCID iD orcid.org/0000-0003-2257-1405

Catalogue record

Date deposited: 21 Feb 2013 11:41
Last modified: 30 Oct 2019 01:32

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Contributors

Author: Thomas Gall ORCID iD
Author: Marc Schiffbauer
Author: Julia Kubny

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