Journal Article | Review of Financial Studies | November 2008

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

by Mihir A. Desai, C. Fritz Foley and Kristin Forbes

Abstract

This paper examines how financial constraints and product market exposures determine the response of multinational and local firms to sharp depreciations. U.S. multinational affiliates increase sales, assets, and investment significantly more than local firms during, and subsequent to, depreciations. Differing product market exposures do not explain these differences in performance. Instead, a differential ability to circumvent financial constraints is a significant determinant of the observed differences in investment responses. Multinational affiliates also access parent equity when local firms are most constrained. 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.

Keywords: Economic Growth; Financial Crisis; Currency; Private Equity; Foreign Direct Investment; Multinational Firms and Management; Emerging Markets; United States;

Citation:

Desai, Mihir A., C. Fritz Foley, and Kristin Forbes. "Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Crises." Review of Financial Studies 21, no. 6 (November 2008).