Title

How Do Foreign Investors Impact Domestic Economic Activity? Evidence from China and India

Publication Date

11-17-2012

Abstract

There has been renewed advocacy for restrictions on international financial flows in the wake of the recent financial crisis. Motivated by this trend, we explore the extent to which cross-border flows affect real economic activity. Unlike previous research efforts that focus on aggregated capital flows, we exploit novel data on forced trading by global mutual funds as a plausible source of exogenous flow shocks. Such forced trading is known to generate large liquidity and price effects, but its real impacts have not been studied extensively. We find that both country- and firm-level investment growth rates are significantly affected by these exogenous capital shocks, and that their effect is more pronounced for firms whose marginal investment decisions are more equity-reliant.

Document Type

Article

Keywords

capital flows, forced trading, fire sales, mutual funds, liquidity, investment, growth

Disciplines

Finance

DOI

10.2139/ssrn.2176217

Source

SMU Cox: Finance (Topic)

Language

English

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