Host-Country Financial Development and Multinational Activity

This paper evaluates the influence of host-country financial development on the global operations of multinational firms. Using detailed U.S. data, we provide evidence that host-country financial development increases entry by multinational affiliates, while also decreasing affiliate sales in the local market relative to the parent country and third-country destinations. These effects are more pronounced in industries that depend more on external sources of financing. The patterns are consistent with the combination of two effects of financial development: 1) a competition effect that reduces individual affiliates' revenues in the host market due to increased entry by domestic firms, and 2) a financing effect that raises affiliate entry and aggregate sales due to affiliates' improved access to external finance in the host country