Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance
Executive Summary — In 2008 and 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, and world trade volume plummeted by more than 40 percent in the second half of 2008. Using a new dataset that reports operational activities of over 12 million establishments worldwide before and after 2008, HBS professor Laura Alfaro and George Washington University professor Maggie Chen study how multinationals around the world responded to the crisis relative to local firms, and the underlying mechanisms of those differential responses. By taking into account establishments both at the epicenter and on the periphery of the crisis, their analysis also considers multinationals' role as an international linkage in transmitting economic shocks. Key concepts include:
- Responses to the crisis differed sharply between multinational and local firms. On average, establishments with multinational ownership performed better than local competitors, but there was considerable differentiation in the role of foreign direct investment.
- Multinationals located in host countries that have experienced sharper declines in aggregate demand and credit conditions displayed a greater advantage over local firms in economic performance.
- Multinationals headquartered in countries with a greater incidence of the crisis, including lower demand and worse credit conditions, fared less satisfactorily overseas, suggesting a potential spillover of home-country shocks.
- Multinational corporation subsidiaries that share vertical production linkages with parent firms exhibited more resilient performance while horizontally linked subsidiaries responded less positively.
- The size of multinational networks matters. Being part of a larger multinational network, on average, was associated with superior economic performance during the crisis. But there was a negative interdependence across establishments with horizontal production linkages.
We examine in this paper the differential response of establishments to the global financial crisis, with particular emphasis on the role of foreign direct investment (FDI) in determining micro economic performance. Using a new worldwide dataset that reports the activities of more than 12 million establishments before and after 2008, we investigate how multinationals around the world responded to the crisis relative to local firms. We explore three distinct channels through which FDI affects establishment performance, (i) production linkages, (ii) financial linkages, and (iii) multinational networks. Our analysis shows that while multinational owned establishments performed, on average, better than their local competitors, there is considerable heterogeneity in the role of FDI. First, multinationals located in countries that experienced sharper declines in aggregate output, demand, and credit conditions displayed a greater advantage over local firms. Multinationals headquartered in countries with a greater incidence of the crisis, in contrast, fared less satisfactorily abroad. Second, multinationals that engaged in activities with vertical production linkages or stronger financial constraints exhibited particularly better responses compared to local firms. Finally, being part of a larger multinational network also led to superior economic performance.
Keywords: global financial crisis, establishment response, foreign direct investment, production linkage, financial linkage, network. 44 pages