Tracing the International Transmission of a Crisis Through Multinational Firms; Marcus Biermann (IRES – Université catholique de Louvain)

Abstract

This paper shows that idiosyncratic shocks to individual firms can affect growth all over the world, even if shocked firms have no direct foreign connections and no operations abroad. We identify an idiosyncratic shock to a German bank, which caused the bank to cut lending to German borrowers. Multinational parent firms located in Germany became financially constrained. In response, international affiliates of affected parents supported their parent by lending through internal capital markets and became constrained themselves. The real growth of affiliates fell sharply and took three years to fully recover. Though the initial shock only hit the domestic activities of a firm in Germany, the impact in other countries was sizable (for instance, around 0.4 percent of aggregate sales in Austria and the Czech Republic). The findings reveal that idiosyncratic shocks to individual firms influence economic outcomes far beyond firms’ direct scope of operation.