The Composition Matters: Capital Inflows and Liquidity Crunch During a Global Economic Crisis

Hui Tong, Shang-Jin Wei
2010 Social Science Research Network  
International capital flows, while potentially beneficial, are said to increase a country's vulnerability to crisis, especially if it is skewed to non-FDI types. This paper studies whether the volume and composition of capital flows affect a country's degree of credit crunch faced by its non-financial firms during the 2008-09 crisis. Using data on 14307 non-financial firms in 44 countries, we find that, on average, the decline in stock price was more severe for firms that are intrinsically more
more » ... intrinsically more dependent on external finance for working capital and long-term investment. The volume of capital flows has no significant effect on credit crunch. However, the composition of capital flows matters: for emerging economies, the pre-crisis exposure to non-FDI capital inflows worsens credit crunch, while the exposure to FDI alleviates liquidity constraint.
doi:10.2139/ssrn.1632061 fatcat:agsyyxestnc55ceiqtviig4sni