Investment Behaviour of Financially Constrained Multinational Corporations: Consequences for the International Transmission of Business Cycle Fluctuations

Diskussionspapiere stehen in der alleinigen Verantwortung des jeweiligen Autors. Die darin vertretenen Auffassungen stellen keine Meinungsäußerung des IWH dar. Anregungen und kritische Bemerkungen zu den dargestellten Untersuchungsergebnissen sind jederzeit willkommen und erwünscht. Abstract The paper investigates the investment decision of a financially constrained multinational corporation (MNC) planning investment projects both at home and in a developing country. The collateral values of the projects diverge because of country specific transactions costs so that the willingness of banks to grant a loan depends not only on the MNC's financial wealth but also on the share of FDI in total investment. It is shown that i) variations in the MNC's financial standing affects FDI stronger than domestic investment, ii) FDI is likely to decrease following a macroeconomic shock to the MNC parent, and iii) domestic investment is likely to increase following a macroeconomic shock to the MNC affiliate.