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DYNAMIC EFFECTS OF FOREIGN DIRECT INVESTMENT WHEN CREDIT MARKETS ARE IMPERFECT

Published online by Cambridge University Press:  03 July 2013

Thomas Gall ,
Marc Schiffbauer  and
Julia Kubny
Thomas Gall*
Affiliation:
University of Bonn
Marc Schiffbauer
Affiliation:
World Bank
Julia Kubny
Affiliation:
German Development Institute/Deutsches Institut für Entwicklungspolitik (DIE)
*
Address correspondence to: Thomas Gall, Economics Division, School of Social Sciences, University of Southampton, Southampton SO17 1BJ, UK; e-mail: [email protected].
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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.

Keywords

Credit Market ImperfectionsForeign Direct InvestmentInequalityGrowthOccupational ChoiceSudden Stops
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 8 , December 2014 , pp. 1797 - 1831
Copyright
Copyright © Cambridge University Press 2013 

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