Business Cycles and FDI: Evidence from German Sectoral Data

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may Abstract:Globalization has affected business cycle developments in OECD countries and has increased activities of firms across national borders. This paper analyzes whether these two developments are linked. We use a new firm-level dataset on the foreign activities of German firms to test whether foreign activities are affected by business cycle developments. We aggregate the data by the sector of the reporting firm, the sector of the foreign affiliate, and the host country. Data are annual and cover the period 1989-2002. We find that German outward FDI increases in response to positive cyclical developments abroad and in response to a depreciation of the domestic currency. Keywords:business cycles, multinational activity, FDI, panel regressions JEL-Classification: E3, F23 Non-Technical SummarySo far, theoretical and empirical literature on multinational firms has focused on the reasons for becoming a multinational, on the reasons for going into a particular country, and on the host and home country effects of multinational activity. In this paper, we add another dimension to the discussion by analyzing the influence of short-term business cycle movements on multinational activity.The starting point of our analysis is the idea that firms' activities might be linked to the business cycle either because of a financial accelerator mechanism or because of the presence of fixed costs of market entry. Since financial frictions and fixed costs of entry can be expected to vary across firms from different sectors, we construct a dataset which contains information on foreign activities of German firms at a sectoral level. Our data are annual and cover a time period of 14 years (1989)(1990)(1991)(1992)(1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002).Our study has four main findings:First, foreign activities of German firms increase in response to positive cyclical developments abroad. This effect was particularly strong in the first and second half of the 1990s. Adjustment to the cycle mainly takes place through changes in volumes rather than entry.Second, a depreciation of the euro has stimulated foreign activities as well. This effect was particularly strong in the first half of the 1990s. In the second half of the 1990s, the real exchange rate effect was weaker, possibly because of the impact of the large valuation changes on global stock markets.Third, business cycle and real exchange rate effects are especial...

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