Financial Frictions and Foreign Direct Investment: Evidence from Japanese Microdata

Authors: Horst Raff, Michael Ryan and Frank Stähler (Journal of International Economics, 2018, Vol. 112, 109-122)

Using Japanese microdata for the period 1980 to 2000 we find evidence for two transmission channels from financial shocks to foreign direct investment: a collateral channel, whereby changes in the value of investors’ landholdings affect their borrowing ability; and a lending channel, whereby changes in bank health affect banks’ lending ability. Decreasing land values by 55% on average from their peak in 1990 to the sample mean reduces the predicted number of investments by 17%. Reducing banks’ market-to-book ratios by an average 61% from their high in 1986 to the sample mean lowers predicted investment counts by 21%.

Keywords: markup premia, detailed trade data, quality, self-selection

JEL Classification: F23, L20

DOI: https://doi.org/10.1016/j.jinteco.2018.02.006