This paper evaluates the effects of destination country financial development (DCFD) on Spanish outward foreign direct investment (OFDI) stock position and gross flows to 127 countries from 75 activities considered at the division level over the period of 2008-2017. This time frame includes in Spain a period of credit restrictions to the private sector from 2008 to 2013, as banks faced liquidity stress which hurt their ability to lend. We applied a modified gravity model and a Poisson pseudo-maximum likelihood estimator to illustrate how the effects of DCFD on Spanish OFDI decreased as the financial vulnerability (FV) at the parent level increased. By using time-varying measures of financial development and FV, we also show how the evolution of the leverage ratios at the parent level could have led to different financing responses in the destination countries, to the extent of making them statistically non-significant during the period of higher leverage and financial stress in Spain. Once the deleveraging process at the parent level was carried out, our results appear to show that Spanish foreign affiliates were able to undertake more investments by obtaining bank financing in the destination countries. This would help explain the change in the pattern of gross investment flows at the end of the study period, both by activities and by destination regions.
Outward foreign direct investment, Destination country financial development, Financial vulnerability, Financial constraints, Spain.