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Unformatted text preview: ain the purchasing ability of foreign (acquiring) firms. These developments further illustrate that the nature of the current crisis differs considerably from previous ones, suggesting that certain key lessons from past crisis lessons might not apply in the current context. Introduction The outlook for private capital flows to emerging market economies, and especially to Latin America, has deteriorated substantially in recent months. Net flows to the region are expected to decline to US$ 43 billion in 2009, down from US$ 89 billion in 2008. This implies a decline of approximately 75% from the record net flows in 2007 —US$ 183.6 billion (IIF, 2009). While all components of net capital flows are projected to decline, the largest drop is expected on net private debt flows —an estimated decline of US$ 40 billion in 2009.162 Recent studies have shown that the various types of financial flows have different dynamics along business cycles and in particular during crises.163 For example, using a panel dataset of 66 countries during 1970‐2003, Levchenko and Mauro (2007) find that net equity flows, FDI flows, are not only less volatile than net debt flows (i.e., portfolio debt flows, bank lending, and trade credit) but also more resilient during episodes of sudden stops. In fact, the authors find that net debt flows explain almost entirely the reversal in the financial account that characterizes a sudden stop. The resilience of FDI flows during crises episodes have been attributed to an increase in fire‐sale foreign direct investment. The tightening of liquidity constraints for domestically owned firms during these episodes has been associated with an increase in foreign acquisitions, usually at significantly low prices. This foreign ownership may facilitate the access of financially‐ constrained domestic firms to world capital markets by bringing transparency, better management, and improved technology. In this note, we argue that, although FDI flows remained resilient during previous crises, they may not behave in a similar fashion during the current financial crisis. Why? Recent crises, including the Asian crisis for example, were circumscribed to the emerging market world. Firms *LCR Crisis Briefs Series. 162 The decline in net private debt flows is even larger, more than US$ 100 billion, if we compare the net private debt flows in 2009 relative to its record level in 2007. 163 See, for example, Sarno and Taylor (1999) and Levchenko and Mauro (2007). 129 buying out Asian firms were not affected by the liquidity crisis and had ample access to financial resources. In contrast, the current crisis has imposed severe liquidity constraints not only on the owners of (financially‐constrained) firms in emerging markets but also on the potential foreign buyers of these firms. We analyze the SDC mergers and acquisition database, which contains high frequency data on all cross‐border mergers and acquisitions since 1985. The dataset includes all corporate transactions (public a...
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