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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

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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Bibliographic Info

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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Cited by:
  1. Müller, Thomas & Schnitzer, Monika, 2003. "Technology Transfer and Spillovers in International Joint Ventures," CEPR Discussion Papers 4099, C.E.P.R. Discussion Papers.
  2. Schmidtchen, Dieter, 2007. "Vereinheitlichung des Vertragsrechts in Europa - eine Lösung auf der Suche nach dem Problem? Die Sicht der Neuen Institutionenökonomik," CSLE Discussion Paper Series 2007-01, Saarland University, CSLE - Center for the Study of Law and Economics.
  3. Axel Dreher & Peter Nunnenkamp & Krishna Chaitanya Vadlamannati, 2011. "The Role of Country-of-origin Characteristics for Foreign Direct Investment and Technical Cooperation in Post-reform India," KOF Working papers 11-283, KOF Swiss Economic Institute, ETH Zurich.
  4. Di Corato, Luca, 2013. "Profit sharing under the threat of nationalization," Resource and Energy Economics, Elsevier, vol. 35(3), pages 295-315.
  5. Kessing, Sebastian G. & Konrad, Kai A. & Kotsogiannis, Christos, 2005. "Federal tax autonomy and the limits of cooperation," Discussion Papers, Research Unit: Market Processes and Governance SP II 2005-18, Social Science Research Center Berlin (WZB).
  6. Buch, Claudia M, 2002. "Are Banks Different? Evidence from International Data," International Finance, Wiley Blackwell, vol. 5(1), pages 97-114, Spring.
  7. Faria, Andr & Mauro, Paolo, 2009. "Institutions and the external capital structure of countries," Journal of International Money and Finance, Elsevier, vol. 28(3), pages 367-391, April.
  8. 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.
  9. Schmidt-Trenz, Hans-Jörg & Schmidtchen, Dieter, 2006. "Territoriality of Law and the International Trade Game: Towards a New Institutional Economics of International Transactions," CSLE Discussion Paper Series 2006-06, Saarland University, CSLE - Center for the Study of Law and Economics.
  10. Dieter M. Urban, 2006. "Multilateral Investment Agreement in a Political Equilibrium," CESifo Working Paper Series 1830, CESifo Group Munich.
  11. André Faria & Philip R. Lane & Paolo Mauro & Gian Maria Milesi-Ferretti, 2007. "The Shifting Composition of External Liabilities," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 480-490, 04-05.
  12. Anyangah, Joshua Okeyo, 2010. "Financing investment in environmentally sound technologies: Foreign direct investment versus foreign debt finance," Resource and Energy Economics, Elsevier, vol. 32(3), pages 456-475, August.

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