Domestic bank health and foreign direct investment

This article provides evidence on the link between Japanese firms' foreign direct investment (FDI) and domestic bank health during the 1990s. Analysis of FDI by 420 industrial firms reveals that financial health of a firm's main bank and non-main banks both positively and significantly relates to the firm's FDI around the globe. The estimated impact of main bank health is smaller than that of non-main banks' financial health, suggesting that close bank-firm ties cushion the impact of bank health deteriorations albeit partially. Regressions also reveal that the sensitivity to domestic bank health varies across firms and investments projects. The variation patterns are consistent with the view that bank health affects FDI by changing the availability of bank credit. J. Japanese Int. Economies 22 (3) (2008) 291-309.