Credit Conditions and Foreign Direct Investment During the Global Financial Crisis

Rodolphe Desbordes
University of Strathclyde - Strathclyde Business School

Shang-Jin Wei
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

October 1, 2014
World Bank Policy Research Working Paper No. 7063

Abstract:      
This paper investigates the effect that tight credit conditions had on outward foreign direct investment flows during the 2008-2010 global financial crisis. A difference-in-differences approach is used to isolate a "credit channel" impact of the global financial crisis on foreign direct investment. The global financial crisis had a stronger negative impact on the relative volume of outward foreign direct investment in financially vulnerable sectors in more financially developed countries, especially if these countries also experienced a banking crisis. These results suggest that lack of access to external finance can partly explain the drop in foreign direct investment during the global financial crisis.

Number of Pages in PDF File: 27

Keywords: Debt Markets, Access to Finance, Bankruptcy and Resolution of Financial Distress, Economic Theory & Research, Emerging Markets