why banks go to emerging countries and what is the impact for the home country -- a survey

22 financial effects relate to the possibility that

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22 Financial effects relate to the possibility that investment abroad substitutes investment at home. If a firm’s cost of capital is not constant, domestic and foreign projects will compete for the use of relatively cheap (and scarce) internally generated funds. Stevens and Lipsey (1992) find some degree of substitution between domestic and foreign investment by U.S. firms. In the same vein, Feldstein (1994) concludes that there is an almost one to one relationship between FDI outflows and U.S. domestic investment. 23 For the case of financial FDI, one could think that international banks have large financing possibilities (including direct funding in the host country), which should limit the impact of their expansion on financial conditions at home. This, however, may change in the event of a crisis in a host country of systemic importance for the parent bank. The interest on the effects of FDI on production lies primarily on possible changes in the geographical distribution of productive activities and employment. On the first issue, the link between a country’s exports and the amount of FDI that firms conduct has been analyzed empirically, in order to determine whether there is substitution between domestic exports and foreign production. This hypothesis is hardly supported in the literature; in fact there is either no relationship or a moderate amount of complementarity between trade and FDI (Blomström and Koko (1994) and Lipsey (2002)). A way to look at this issue for the specific case of financial FDI is to compare the evolution of cross-border lending and local activity in a foreign country. While there is virtually no 21 See Clarkel et al. (2002), and Sousa (2003) for a review of the literature 22 This section draws heavily from the literature review of Lipsey (2002). 23 Since most countries do not have detailed statistics on direct foreign investment outflows, most of the results are limited to the United States, Japan and Sweden
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17 literature on this issue, anecdotal evidence shows that the relation is weak, particularly for banks operating in the retail sector abroad. The second aspect related to production is the potential reduction of domestic employment due to the multinationals’ ability to deploy operations in low-wage countries. A number of studies analyze the effects of FDI outflows on the level of employment in source countries. Blomström, Fors and Lipsey (1997) show that U.S. multinationals do indeed reduce their labour intensity after an increase in foreign production, particularly if located in developing countries. However, they find the opposite for Swedish multinationals. These somewhat contradictory results may be explained by the differences in multinationals’ strategies of international expansion. While U.S. firms seem to pursuit factor cost advantages, Swedish firms’ investment decisions have been driven by natural resources and technological advantages. The case of Japan is less clear. While their firms’ strategies are similar to those of US firms, employment is not reduced. This might be related to life-time employment
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  • Fall '10
  • financial fdi

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