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Title:Dynamic Effects of Foreign Direct Investment When Credit Markets are Imperfect PDF Logo
Authors:Gall, Thomas
Schiffbauer, Marc
Kubny, Julia
Issue Date:2010
Series/Report no.:Proceedings of the German Development Economics Conference, Hannover 2010 5
Abstract:This paper argues that foreign direct investment in economies with credit market imperfections may increase their vulnerability to capital flow shocks. Due to better access to financial markets foreign firms can use other wage contracts than domestic 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 foreign direct investment may significantly impede the capability to recover from sudden withdrawals of foreign capital. This is substantiated by empirical evidence on durations of output recovery after systemic sudden stops.
Subjects:Credit market imperfections
foreign direct investment
growth
occupational choice
sudden stops
JEL:F43
F23
O16
Document Type:Conference Paper
Appears in Collections:Proceedings of the German Development Economics Conference, 2010 (Hannover)

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