Ebook Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance
In 2008-2009, the world economy suffered the deepest global financial crisis since World War II. Countries around the globe witnessed major declines in output, employment, and trade. GDP in industrial countries fell by 4.5 percent in 2008, and average real GDP growth in emerging economies dropped from 8.8 percent in 2007 to 0.4 at the beginning of 2009. The unemployment rate rose to 9 percent across OECD economies, and reached double digits in a mix of industrial and developing nations. World trade volume plummeted by more than 40 percent in the second half of 2008, collapsing at a rate that outpaced the fall of aggregate output.
Its severity led many economists to explore the macro patterns and causes of the recent crisis. Rose and Spiegel (2009), for example, investigate the role of trade and financial linkages in explaining the differential extent of the crisis across countries. Using a large country level cross section dataset, they do not find international linkages to be clearly associated with incidences of the crisis. Eaton et al. (2009) and Chor and Manova (2009), among others, examine the potential causes of the great trade collapse, a phenomenon that received particular attention in the recent crisis, and find, respectively, that manufacturing demand and credit conditions played important roles.
Less stressed in this debate is the performance of foreign direct investment (FDI) and its role in the global financial crisis. In 2008, multinationals' foreign affiliate sales fell by 4.6 percent, in sharp contrast to the 24 percent growth rate the year before (see UNCTAD, 2009). Similarly, the growth rate of foreign affiliate production dropped from 20 percent in 2007 to -4.4 percent in 2008. Exports of foreign affiliates performed exceptionally well compared to the other indicators, and sustained a robust growth rate of 15 percent even in the midst of the world trade collapse. These observations suggest that multinational corporations are likely to exhibit a complex pattern of responses to the crisis.
An evaluation of these patterns poses several challenges, however. First, it is difficult to disentangle the effect of FDI from other macroeconomic factors such as market demand, trade integration, and credit conditions. Second, the channels through which FDI affects economic performance are likely to be masked in aggregate data. Third, many national sources, especially in less developed nations, lag considerably in assembling aggregate economic data including data on FDI.
In this paper, we investigate the role of foreign direct investment in determining micro economic responses to the crisis. In contrast to existing studies of the recent crisis, which focus on aggregate economic outcomes at country and industry levels, we use a new worldwide dataset that reports operational activities of more than 12 million establishments before and after 2008 to examine patterns of economic crisis at the most disaggregated level. We study how multinationals around the world responded to the crisis relative to local firms, and the underlying mechanisms of the differential responses. The use of establishment level data enables us to explore variations within the same country and industry, and separate the effect of foreign direct investment from macroeconomic factors. The worldwide coverage enables us to exploit heterogeneity across countries, industries, and individual multinationals to identify the channels through which FDI affects economic performance.
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