Global Financial Crisis: The Role of Export, Competition and Finance

Abstract

The Global Financial Crisis (GFC) was a temporal phenomenon of intense turmoil in international financial markets and banking systems, spanning from mid-2007 to early 2009. The crisis was sparked by the collapse of the U.S. housing bubble and the massive failure of subprime mortgage loans. Due to the extensive interconnections of the global financial system, it rapidly spread beyond the United States, resulting in a worldwide economic meltdown that had lasting impacts on economies, employment, and financial regulations. In this background, this paper presents a theoretical framework to study the significant role of foreign direct investment and export in limiting the impact of global financial crisis. The study further reinforces its theoretical findings through comprehensive empirical investigation of the crisis-impacted economies. The theoretical model is based on Cobb-Douglas function with market capitalization of listed domestic companies as dependent variable and foreign direct investment and competition-augmented export as independent variables. The findings of the study strongly determine the positive influence of FDI and export on financial crisis. However, the theoretical framework in the present paper also helps in determining the critical values of FDI and export at which global financial crisis is minimized. The paper thus provides directions for reviving the economies from the grips of financial distress by adopting FDI and export driven policies.