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Debt vs. 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

In this paper the two standard forms of international investment in developing countries – debt and foreign direct investment (FDI) – are compared from a finance perspective. We show that the sovereign risks associated with debt finance are generally less severe than those accompanying 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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1608.

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Date of creation: Mar 1997
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Handle: RePEc:cpr:ceprdp:1608

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Related research
Keywords: Foreign Direct Investment; International Debt Crisis; Joint Ventures; Sovereign Risk;

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Find related papers by JEL classification:
F2 - International Economics - - International Factor Movements and International Business
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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  1. Müller, Thomas & Schnitzer, Monika, 2003. "Technology Transfer and Spillovers in International Joint Ventures," CEPR Discussion Papers 4099, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. repec:bep:dewple:2006-1-1157 is not listed on IDEAS
  3. repec:bep:dewple:2007-1-1195 is not listed on IDEAS
  4. 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:
  5. Claudia M. Buch, 2000. "Are Banks Different? Evidence from International Data," Kiel Working Papers 1012, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  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. 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!]
  8. 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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