Multinational Firms and the International Transmission of Crises : The Real Economy Channel

This paper studies investment and employment at a subsidiary located in a non-crisis country if its parent firm also has a subsidiary in a crisis country. It finds that investment is about 18% lower in the subsidiaries of these parents relative to the sameindustry, same-country subsidiaries of multinational firms that do not have a subsidiary in a crisis country. Employment growth rate in the affected subsidiaries is zero or negative while it is 1.4% in the subsidiaries of unaffected parents. These results hold for the parents that are unlikely financially constrained and are robust to controlling for subsidiary and parent size, parent cash flow, subsidiary country, industry, year, and parent country, as well as using alternative crisis definitions. The industry-level sales and employment are also negatively impacted in countries of the affected subsidiaries.