Essays on International Trade, Capital Flows and Financial Frictions

Two particular concerns in international economics motivate this research: I. How are real and financial activities related to each other in a globalized economy? II. What role do financial frictions play in this relationship? Three essays look at these questions from different perspectives. The first chapter revises the old question on the relation between FDI and exports on French firms, where theory seems to be at odds with empirical findings. Most FDI and most trade take place between rich markets, where theory predicts a substitutability relationship, while empirical studies have almost invariably found a complementarity relation. We develop a theoretical framework which allows reconciling this apparent empirical and theoretical mismatch and we bring new evidence on the substitutability effect, which takes place in the best performing products of the firm when in strong demand markets the investment is sufficiently large. The second chapter examines how external financial needs- measured at the sector level- and financial development at the country level interact to shape the aggregate marginal product of capital of a country (MPK) and its foreign direct investment inflows (FDI). Our findings imply that financial development seems to be a necessary condition -and certainly not a sufficient one- in order for production in financially dependent sectors to positively affect aggregate MPK and attract FDI in developing countries. This analysis contributes to explain the Lucas’ Paradox of why capitals don’t flow from rich to poor countries in the ways predicted by theory. The third chapter studies the transmission of global shocks during the Great Recession and its impact on French employment. Particularly, we explore the role of trade credit in the propagation of cross-border shocks. Our findings imply that strongly relying on trade credit made firms more vulnerable to unanticipated shocks, for which the adverse impact of the crisis was exacerbated. This effect intensified among firms with important sourcing ties with severely shocked countries, while the negative effect of the crisis was mitigated when sourcing relations with countries subject to milder shocks were stronger. Our contribution to the literature adds to the debate on the role of trade finance in explaining the real economic downturn across borders