Working Paper
Financial Frictions and Foreign Direct Investment: Theory and Evidence from Japanese Microdata
Authors
Publication Date
JEL Classification
F23
L20
Key Words
Related Topics
Foreign Direct Investments
Financial Markets
Companies
We use Japanese microdata to examine how financial market frictions affect foreign direct investment (FDI). The Japanese land price bubble and banking trouble in the late 1980s and early 1990s serve as a quasi natural experiment to identify two possible transmission channels from financial shocks to FDI: (i) a collateral channel, whereby changes in the value of collateral affect investors’ ability to borrow; and (ii) a lending channel, whereby changes in bank health affect banks’ ability to lend. We find evidence that both transmission channels are statistically significant and economically important.
