In many economies, a substantial fraction of investment is by multinat

In many economies, a substantial fraction of investment is by multinational corporations (MNCs) whose stock value is determined on global markets.

Based on Tobin’s q theory, how might we expect MNC investment to affect the volatility of aggregate investment in an economy?

ANSWER

If investment is sensitive to global market valuation, then it is less sensitive to economic conditions in a particular economy. The economy’s business cycle should have lower amplitude, and investment should be less volatile. Unless the (global) market valuation of the MNCs is more volatile than the economy’s aggregate investment, or happens to be closely correlated with the economy’s business cycle.