Investment Following a Financial Crisis: Does Foreign Ownership Matter?

We investigate whether foreign ownership shields firms from liquidity constraints following a financial crisis. Recent crises in East Asia, Latin America, and Russia have been characterized both by large currency devaluations and widespread collapse of the banking sector. Although a currency devaluation should increase exporters’ competitiveness and investment, a collapsing banking system may deny credit to the very firms that should lead the recovery. Foreign-owned firms, which have greater access to overseas financing, may be able to overcome these liquidity constraints faced by otherwise equivalent domestic rivals. We examine this possibility in Indonesia following the 1997 East Asian financial crisis, a period when domestic banks sharply reduced available credit in order to comply with new banking reform laws and avoid closure. Exporters’ value added and employment increased following the crisis, suggesting that they profited from the devaluation and had sufficient cash flow to finance more workers. However, only exporters with foreign ownership increased investment significantly. The failure of domestic firms to invest under profitable conditions suggests that they faced liquidity constraints.