title: Essays on financial integration
Creators: name: Kilembe, Jessie Nabulambo
Publisher: name: University of Glasgow
Year: 2020
Subjects: subject: Capital flows, financial development, global financial crisis, unconventional monetary policy, international spillovers, asset allocation, institutional investors, uncertainty.

description: Financial integration has progressively increased over the past decade. Following the global financial crisis and the turmoil that ensued, external financing conditions changed. The global financial architecture went through significant adjustments consequently affecting global financing conditions. Emergent issues in response to the evolving global financial conditions included changes to monetary and financial sector regulation which had consequences for the capacity of banks to extend credit. Accordingly, the availability of credit is likely to have adversely affected the investment activity of firms, with potentially a more pronounced effect on for multinational corporations exposed to greater risk and information asymmetry associated with investing in foreign countries. In advanced economies, central banks pursued expansionary monetary policies to stimulate domestic economies by lowering the short-term policy interest rates. The central banks lowered the policy rate to the effective lower bound and resorted to unconventional tools of monetary policy in efforts to revive domestic economic activity. However, as a result of greater financial integration across countries, the unconventional monetary policies adopted by major economies also generated unintended consequences for countries abroad. International financial institutions which play a critical role in the intermediation and allocation of capital across countries also facilitated this cross-border transmission. Accordingly, the unconventional monetary policies pursued by the United States, United Kingdom, Japan and the European Central Bank instigated debate pertaining to the consequences of the spillover effects. Moreover, the evolving global financing conditions and low interest rate environment that ensued subsequent to the global financial crisis also catalysed the surge in capital flows going to emerging market and developing economies. Furthermore, a period of slow growth ensued in the aftermath of the global financial crisis. This slow global growth has been largely attributed to greater uncertainty which has been observed to have had a detrimental on real economic activity. Firms are more inclined to postpone large investment activities when uncertainty is high. Moreover, various types of uncertainty will probably influence firms and households' decisions differently. It is within this context that there has been a rise in prominence of policy debates on the role of different types of uncertainty for economic activity and most recently capital flows. Therefore, the focus of this thesis is the role of external financing conditions and uncertainty on multinational corporations' cross-border direct invest and the consequences of unconventional monetary policies implemented by major advanced economies on the portfolio allocation of institutional investors. The thesis presents three chapters in macroeconomics with an emphasis on cross-border capital flows and the role credit constraints and uncertainty and cross-border asset allocation of institutional investors in response to monetary policies in developed economies. The first empirical chapter examines the effects of country-specific financial market development on cross-border direct investment. It examines the extent to which financial development in source and host countries affects bilateral foreign direct investment (FDI). Using the gravity model, the effects of financial market development on outward foreign direct investment to emerging market and developing economies is investigated. Furthermore, it examines the role of the global financial crisis and idiosyncratic systemic banking crises on outward bilateral foreign direct investment. The main finding is that greater financial development in both origin and destination countries enhances outward bilateral foreign direct investment. The results confirm the volume of outward foreign direct investment to emerging market and developing economies declined with the global financial crisis. Furthermore, in source countries experiencing a systemic banking crisis, there is evidence that financial constraints reduced aggregate outward foreign direct investment. The second empirical chapter examines the international transmission of monetary policy through non-bank financial institutions. International financial institutions have a critical role in intermediating and allocating capital across countries and therefore facilitating cross-border transmission of monetary policy. Using quarterly data on individual institutional investors, this chapter studies the international transmission of monetary policy conducted by major advanced economies on the cross-border portfolio allocation of large institutional investors. The results reveal that in response to unconventional monetary policies, large institutional investors contributed to the surge in capital inflows to emerging markets and developing countries. While institutional investors contributed to the international transmission of monetary policy, the results also reveal that these policies prompted institutional investors to increase allocation at home. The results show cross-border transmission effects supportive of the portfolio balance and risk-taking channels of monetary policy transmission. The third empirical chapter examines whether foreign direct investment responds symmetrically to domestic and foreign uncertainty. The response of foreign direct investment to different types of uncertainty is empirically examined using the gravity model technique. Using bilateral foreign direct investment inflows, the results reveal that multinational corporations respond heterogeneously to different types of uncertainty in both source and host countries. Furthermore, this response is distinct between advanced economies and emerging markets economies recipients. Greater uncertainty regarding financial markets in the destination country deters foreign direct investment into the economy. However, this effect is only relevant for outward foreign direct investment going to advanced economies and is not relevant for emerging market and developing host countries. Political uncertainty in the host country reduces foreign direct investment to developed country destinations with no significant effects found for developing host countries. Similarly, macroeconomic uncertainty is only relevant in driving foreign direct investment flows to advanced economies. The empirical findings suggest that multinational corporations will respond to this aspect of uncertainty regarding economic activity in advanced economies and not in emerging market and developing economies. Generally, economic policy uncertainty in in both source and host countries discourages multinational corporations undertaking foreign direct investment activity. This negative effect is stronger for host country economic policy uncertainty. Nevertheless, there are distinct effects when country groups are considered. For foreign direct investment going into developed countries, higher economic policy uncertainty in the host country deters foreign direct investment inflows into the economy. Therefore, from the perspective of advanced economies, greater economic policy uncertainty is detrimental for attracting foreign direct investment in inflows. In contrast, for emerging market economies, economic policy uncertainty in the home country of the multinational corporation is found to be more important. This finding suggests that heightened economic policy uncertainty in the home country of the multinational corporation discourages outward foreign direct investment. This corroborates prior evidence in the empirical literature highlighting the relevance of the role of external supply-side factors in driving inflows to emerging market and developing host countries.