Debt versus Foreign Direct Investment: The Impact of Sovereing Risk on the Structure of Capital Flows to Developing Countries
AbstractIn this paper we compare the two standard forms of international investments in developing countries, debt and foreign direct investment, form a finance perspective. It is shown that the sovereign risks associated with debt finance are generally less severe than the ones which 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. We show furhtermore that the host country and the foreign investor may benefit from forming a joint venture.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number 484.
Date of creation: May 1995
Date of revision:
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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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Foreign Direct Investment; Sovereign Risk; International;
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