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American Economic Review Vol. 92 No. 3 2002

Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit

Michael W. Klein1; Joe Peek2; Eric S. Rosengren3

1 Fletcher School of Law and Diplomacy, Tufts University, Medford, MA 02155, and National Bureau of Economic Research. · 2 Gatton College of Business and Economics, University of Kentucky, Lexington, KY 40506. · 3 Supervision and Regulation Department, T-10, Federal Reserve Bank of Boston, 600 Atlantic Avenue, Boston, MA 02106.

Abstract

During the 1980's, theories were developed to explain the striking correlation between real exchange rates and foreign direct investment (FDI). However, this relationship broke down for Japanese FDI in the 1990's, as the real exchange rate appreciated while FDI plummeted. We propose the relative access to credit hypothesis and show that unequal access to credit by Japanese firms contributes to the explanation of declining Japanese FDI. Using bank-level and firm-level data sets, we find that financial difficulties at banks were economically and statistically important in reducing the number of FDI projects by Japanese firms into the United States.

DOI
10.1257/00028280260136309
Volume
92
Issue
3
Pages
664-682
Language
en
Sources
crossref openalex bibtex:phds-export.bib

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