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Debt versus Foreign Direct Investment: The Impact of Sovereing Risk on the Structure of Capital Flows to Developing Countries

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  • Monika Schnitzer

Abstract

In 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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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonsfa/bonsfa484.ps
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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number 484.

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Date of creation: May 1995
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Handle: RePEc:bon:bonsfa:484

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

Related research

Keywords: Foreign Direct Investment; Sovereign Risk; International;

References

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  1. Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Papers 411, Stockholm - International Economic Studies.
  2. Eaton, J. & Fernandez, R., 1995. "Sovereign Debt," Papers 37, Boston University - Department of Economics.
  3. Fernandez, Raquel & Rosenthal, Robert W, 1990. "Strategic Models of Sovereign-Debt Renegotiations," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 331-49, July.
  4. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  5. Eaton, Jonathan, 1993. "Sovereign Debt: A Primer," World Bank Economic Review, World Bank Group, vol. 7(2), pages 137-72, May.
  6. Kobrin, Stephen J., 1987. "Testing the bargaining hypothesis in the manufacturing sector in developing countries," International Organization, Cambridge University Press, vol. 41(04), pages 609-638, September.
  7. Kobrin, Stephen J., 1980. "Foreign enterprise and forced divestment in LDCs," International Organization, Cambridge University Press, vol. 34(01), pages 65-88, December.
  8. Raff, H, 1991. "A Model of Expropriation with Asymetric Information," Cahiers de recherche 9105, Université Laval - Département d'économique.
  9. Eaton, Jonathan & Gersovitz, Mark, 1984. "A Theory of Expropriation and Deviations from Perfect Capital Mobility," Economic Journal, Royal Economic Society, vol. 94(373), pages 16-40, March.
  10. Thomas, J. & Worral, T., 1991. "Foreign Direcyt Investment and the Risk of Expropriation," Papers 9126, Tilburg - Center for Economic Research.
  11. Herschel I. Grossman & John B. Van Huyck, 1985. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," NBER Working Papers 1673, National Bureau of Economic Research, Inc.
  12. Jeremy I. Bulow & Kenneth Rogoff, 1987. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  13. Ignatius Horstmann & James R. Markusen, 1987. "Licensing versus Direct Investment: A Model of Internalization by the Multinational Enterprise," Canadian Journal of Economics, Canadian Economics Association, vol. 20(3), pages 464-81, August.
  14. Bulow, Jeremy & Rogoff, Kenneth S., 1989. "A Constant Recontracting Model of Sovereign Debt," Scholarly Articles 12491028, Harvard University Department of Economics.
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Cited by:
  1. Monika Schnitzer, 1996. "Expropriation and Control Rights: A Dynamic Model of," Discussion Paper Serie A 515, University of Bonn, Germany.

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