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Debt v. Foreign Direct Investment: The Impact of Sovereign Risk on the Structure of International Capital Flows

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Schnitzer, Monika

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Abstract

The paper compares the two standard forms of international investment in developing countries, debt and foreign direct investment (FDI), from a finance perspective. The sovereign risks associated with debt finance are shown to be generally less severe than the ones that come with FDI. FDI is chosen only if the foreign investor is more efficient in running the project, if the project is risky, and if the foreign investor has a good outside option which deters creeping expropriation. The sovereign risk problem of FDI can be alleviated if the host country and the foreign investor form a joint venture. Copyright 2002 by The London School of Economics and Political Science

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Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 69 (2002)
Issue (Month): 273 (February)
Pages: 41-67
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Handle: RePEc:bla:econom:v:69:y:2002:i:273:p:41-67

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  1. Müller, Thomas & Schnitzer, Monika, 2003. "Technology Transfer and Spillovers in International Joint Ventures," Discussion Papers in Economics 93, University of Munich, Department of Economics. [Downloadable!]
    Other versions:
  2. André Faria & Philip R. Lane & Paolo Mauro & Gian Maria Milesi-Ferretti, 2007. "The Shifting Composition of External Liabilities," The Institute for International Integration Studies Discussion Paper Series iiisdp190, IIIS. [Downloadable!]
    Other versions:
  3. Buch, Claudia M. & Heinrich, Ralph P. & Schertler, Andrea, 2003. "External and Internal Financial Structures in Europe: A Corporate Finance Perspective," EIFC - Technology and Finance Working Papers 19, United Nations University, Institute for New Technologies. [Downloadable!]
  4. repec:bep:dewple:2007-1-1195 is not listed on IDEAS
  5. repec:bep:dewple:2006-1-1157 is not listed on IDEAS
  6. Stephane Straub, 2004. "Opportunism, Corruption and the Multinational Firm’s Mode of Entry," ESE Discussion Papers 102, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
    Other versions:
  7. repec:bep:glecon:5:2007:2:4 is not listed on IDEAS
  8. Claudia M. Buch, 2000. "Are Banks Different? Evidence from International Data," Kiel Working Papers 1012, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  9. Dieter M. Urban, 2006. "Multilateral Investment Agreement in a Political Equilibrium," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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