Optimal Sequencing for Foreign Direct Investments in Emerging Economies: the Case
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Optimal Sequencing for Foreign Direct Investments in Emerging Economies: the Case of the Czech Republic (1993-1997) Marc GERARD? FORUM, University of Paris X April 2005 Abstract This paper develops a framework for analyzing the impact of FDI on a small open economy with firms facing an external credit constraint. We show that FDI may generate wealth fluctuations because of their two-fold e?ects. On the one hand, they directly increase the amount of collat- eral available within the economy, thus relaxing the credit constraint and boosting production. On the other hand, they tend to tighten domestic financing conditions, thus downgrading the firms' profitability. Therefore, there is scope for FDI optimal sequencing. JEL: F21, F34, F36, F41, G28 Keywords: Foreign direct investments, Open economy macroeconomics, Financial constraints, International macroeconomics, Financial cycles 1 Introduction The recent episodes of emerging market crises have increased awareness of the potentially destabilizing e?ects of large capital inflows in economies with un- derdevelopped financial systems, in the wake of financial liberalization and the opening up of the capital account. In particular, among the sources of external financing, portfolio investments have been put under accusation for increasing short-term volatility on the domestic capital markets and bringing frailty into the domestic banking systems. On the opposite, the role of foreign direct invest- ments (FDI) has been much less documented, with related analyses generally concentrating on their long-term positive e?ects on potential growth.
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Optimal Sequencing for Foreign Direct Investments in Emerging Economies: the Case of the Czech Republic (1993-1997) Marc GERARD? FORUM, University of Paris X April 2005 Abstract This paper develops a framework for analyzing the impact of FDI on a small open economy with firms facing an external credit constraint. We show that FDI may generate wealth fluctuations because of their two-fold e?ects. On the one hand, they directly increase the amount of collat- eral available within the economy, thus relaxing the credit constraint and boosting production. On the other hand, they tend to tighten domestic financing conditions, thus downgrading the firms' profitability. Therefore, there is scope for FDI optimal sequencing. JEL: F21, F34, F36, F41, G28 Keywords: Foreign direct investments, Open economy macroeconomics, Financial constraints, International macroeconomics, Financial cycles 1 Introduction The recent episodes of emerging market crises have increased awareness of the potentially destabilizing e?ects of large capital inflows in economies with un- derdevelopped financial systems, in the wake of financial liberalization and the opening up of the capital account. In particular, among the sources of external financing, portfolio investments have been put under accusation for increasing short-term volatility on the domestic capital markets and bringing frailty into the domestic banking systems. On the opposite, the role of foreign direct invest- ments (FDI) has been much less documented, with related analyses generally concentrating on their long-term positive e?ects on potential growth.
- country specific
- high-yield sterilization
- collateral con- straint
- capital productivity
- interest rate
- specific factor
- financial constraints
- sustained large-scale capital
Optimal Sequencing for Foreign Direct Investments in Emerging Economies: the Case of the Czech Republic (1993-1997)
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∗ Marc GERARD FORUM, University of Paris X
April 2005
Abstract This paper develops a framework for analyzing the impact of FDI on a small open economy withÞrms facing an external credit constraint. We show that FDI may generate wealthßuctuations because of their two-fold effects. On the one hand, they directly increase the amount of collat-eral available within the economy, thus relaxing the credit constraint and boosting production. On the other hand, they tend to tighten domestic Þnancing conditions, thus downgrading theÞrms’ proÞtability. Therefore, there is scope for FDI optimal sequencing. JEL: F21, F34, F36, F41, G28 Keywords: Foreign direct investments, Open economy macroeconomics, Financial constraints, International macroeconomics, Financial cycles
Introduction
The recent episodes of emerging market crises have increased awareness of the potentially destabilizing effects of large capital inßows in economies with un-derdeveloppedÞnancial systems, in the wake ofÞnancial liberalization and the opening up of the capital account. In particular, among the sources of external Þnancing, portfolio investments have been put under accusation for increasing short-term volatility on the domestic capital markets and bringing frailty into the domestic banking systems. On the opposite, the role of foreign direct invest-ments (FDI) has been much less documented, with related analyses generally concentrating on their long-term positive effects on potential growth. However, a few months before the outbreak of the crisis in East Asia in summer 1997, the Czech Republic underwent a severe foreign exchange crisis directly following
∗ Université Paris X - Nanterre, Bât K, 200 av de la République, 92001 Nanterre, Tel: 01 40 97 59 14, Fax: 01 40 97 78 86, m.gerard@u-paris10.fr
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