Multinational Firms, FDI Flows and Imperfect Capital Markets


Antràs, Pol, Mihir A. Desai, and C. Fritz Foley. 2007. “Multinational Firms, FDI Flows and Imperfect Capital Markets”. Copy at
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Date Published:

Nov 1, 2007


This paper examines how costly …nancial contracting and weak investor protection in‡uence the cross-border operational, …nancing and investment decisions of …rms. We develop a model in which product developers can play a useful role in monitoring the deployment of their technology abroad. The analysis demonstrates that when …rms want to exploit technologies abroad, multinational …rm (MNC) activity and foreign direct investment (FDI) ‡ows arise endogenously when monitoring is nonveri…able and …nancial frictions exist. The mechanism generating MNC activity is not the risk of technological expropriation by local partners but the demands of external funders who require MNC participation to ensure value maximization by local entrepreneurs. The model demonstrates that weak investor protections limit the scale of multinational …rm activity, increase the reliance on FDI ‡ows and alter the decision to deploy technology through FDI as opposed to arm’s length licensing. Several distinctive predictions for the impact of weak investor protection on MNC activity and FDI ‡ows are tested and con…rmed using …rm-level data.


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