and sold in foreign markets (Manova, 2013). The ED measure developed by Rajan and Zingales (1998) is based on a sample of large U.S. companies, which are likely to have activities abroad. This sample composition helps to make it a good proxy for the typical external financing needs of MNEs in a given sector.

Sectors not only vary in firms’ reliance on external finance but also in firms’ ability to access external finance. For a given technological need for external finance, raising outside finance is likely to be easier for firms in sectors structurally characterised by a high level of tangible assets. These assets can be pledged as collateral,<sup>40</sup> reducing in that way the adverse selection and moral hazard problems that lenders face. To capture this second dimension of financial vulnerability, we use Kroszner et al. (2007)’s measure of asset tangibility (TANG). It corresponds to the sector-specific ratio of fixed assets to total assets and it has been calculated for the period 1980-1999 using the same methodology as Rajan and Zingales (1998).<sup>41</sup> While the TANG measure is not specific to FDI activities, firms are more likely to have access to external finance, at home or abroad, when their existing assets, or the assets they wish to acquire in a foreign country, are tangible.<sup>42</sup> Table 5 in Appendix A provides the values of the two measures of financial vulnerability for the 13 manufacturing sectors present in the _fDi Markets_ database. Sectors vary both in their dependence on external finance and their ability to access external finance.<sup>43</sup>

# **4.4 Measure of sector-specific activity**

We use sector-specific value added in 2002 as the measure of the manufacturing activity in a given sector and country. Production data can be found in the CEPII _Trade and Production Database_ .<sup>44</sup> We use the 2002

> 40Unlike intangible assets, tangible assets can be easily liquidated in case of default.

> 41Kroszner et al. (2007) have also calculated an ED measure for the period 1980-1999. Our results are similar when we use this alternative ED variable.

> 42Given that our main FDI variable corresponds to capital expenditures, i.e. investment in collateralizable tangible assets, it could be argued that asset tangibility is not an appropriate measure of financial vulnerability. This may have been true if external finance was only sought to cover the costs of building a new manufacturing facility. However, outside capital is also likely to be required to invest in intangible assets complementary to the tangible assets. Engaging in FDI may then be conditional on the ability of firms to finance the intangible assets that they need to operate successfully in foreign markets. This constraint should be particularly strong for firms operating in sectors where intangible assets are at the core of their business. It is also possible that sector-specific asset tangibility matters if the loan financing the FDI project is backed by the tangible assets of the parent company. That may be the case if a domestic bank does not want to deal with the seizure of assets in a foreign jurisdiction. For these reasons, TANG ought to remain a valid measure of financial vulnerability, including in the context of this paper.

> 43The coefficient of correlation between the two financial vulnerability measures is 0.04.

> 44http://www.cepii.fr/anglaisgraph/bdd/TradeProd.asp Data originally come from UNIDO’s Industrial Statistics Database and have been occasionally complemented with OECD data.

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