Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit

Michael W. Klein, Joe Peek, Eric S. Rosengren

American Economic Review · 2002 · Volume 92 · Issue 3

Abstract

During the 1980's, theories were developed to explain the striking correlation between real exchange rates and foreign direct investment (FDI). However, this relationship broke down for Japanese FDI in the 1990's, as the real exchange rate appreciated while FDI plummeted. We propose the relative access to credit hypothesis and show that unequal access to credit by Japanese firms contributes to the explanation of declining Japanese FDI. Using bank-level and firm-level data sets, we find that financial difficulties at banks were economically and statistically important in reducing the number of FDI projects by Japanese firms into the United States. (JEL G21, F36)

Keywords

International Investment, Long-term Capital Movements, Multinational Firms, International Business, Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Enable JavaScript for citation tools and additional paper interactions.