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Is FDI a Safer Form of Financing?

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Author Info
Eduardo Fernández-Arias ()
Ricardo Hausmann

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Abstract

It has been common to attribute financial crises to short-term capital inflows, while foreign direct investment (FDI) is seen as a safer form of finance. The relationship between crises and the composition of capital flows is particularly relevant at present because the flow of capital to Latin America is becoming increasingly dominated by FDI. This paper asks whether the composition of capital inflows and of the stock of foreign liabilities is relevant for financial crises, be it their frequency, depth, or length. It explores the possible role of FDI as a benign form of external liability relative to other classes of liabilities, reviewing both analytical and empirical arguments.

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Paper provided by Inter-American Development Bank, Research Department in its series RES Working Papers with number 4201.

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Date of creation: Mar 2000
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Handle: RePEc:idb:wpaper:4201

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Classens, S. & Dooley, M.P. & Warner, A., 1995. "Portfolio Capital Flows: Hot or Cold," Papers 501, Harvard - Institute for International Development.
    Other versions:
  2. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December. [Downloadable!] (restricted)
    Other versions:
  3. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, vol. 6(4), pages 459-472, November. [Downloadable!] (restricted)
  4. Roberto Chang & Andres Velasco, 1998. "Financial Fragility and the Exchange Rate Regime," NBER Working Papers 6469, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November. [Downloadable!] (restricted)
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  6. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany. [Downloadable!]
  7. Reinhart, Carmen & Goldstein, Morris & Kaminsky, Graciela, 2000. "Assessing financial vulnerability, an early warning system for emerging markets: Introduction," MPRA Paper 13629, University Library of Munich, Germany. [Downloadable!]
  8. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany. [Downloadable!]
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  9. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Thomas D. Willett & Aida Budiman & Arthur Denzau & Gab-Je Jo & Cesar Ramos & John Thomas, 2001. "The Falsification of Four Popular Hypotheses about International Financial Behavior during the Asian Crisis," Claremont Colleges Working Papers 2001-06, Claremont Colleges, revised Sep 2001. [Downloadable!]
  2. Peter Nunnenkamp, 2001. "Too Much, Too Little, or Too Volatile? International Capital Flows to Developing Countries in the 1990s," Kiel Working Papers 1036, Kiel Institute for the World Economy. [Downloadable!]
  3. Ramkishen S. Rajan & Chung-Hua Shen, 2002. "Are crisis-induced devaluations contractionary?," Pacific Basin Working Paper Series 02-06, Federal Reserve Bank of San Francisco. [Downloadable!]
  4. Dubravko Mihaljek, 2001. "Toward a Long-Term Strategy of Economic Development of Croatia: Where to Begin, What to Do, and How to Do It?," Occasional paper series 11, Institute of Public Finance. [Downloadable!]
  5. Arslan Razmi, 2005. "The Effects of Export-Oriented, FDI-Friendly Policies on the Balance of Payments in a Developing Economy: A General Equilibrium Investigation," Working Papers 2005-03, University of Massachusetts Amherst, Department of Economics, revised Sep 2006. [Downloadable!]
  6. Michael D. Bordo & Marc Flandreau, 2001. "Core, Periphery, Exchange Rate Regimes, and Globalization," NBER Working Papers 8584, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Ayse Imrohoroglu & Krishna B. Kumar, 2003. "Entry Costs, Intermediation, and Capital Flows," Macroeconomics 0304001, EconWPA. [Downloadable!]
  8. Joel Deichmann & Socrates Karidis & Selin Sayek, 2003. "Foreign direct investment in Turkey: regional determinants," Applied Economics, Taylor and Francis Journals, vol. 35(16), pages 1767-1778, November. [Downloadable!] (restricted)
  9. Ayse Imrohoroglu & Krishna B. Kumar, 2004. "Intermediation Costs and Capital Flows," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 586-612, July. [Downloadable!] (restricted)
  10. Ajay Shah & Ila Patnaik, 2005. "India's Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Defecit," NBER Working Papers 11387, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Hoffmann, M., 2002. "Cross-Country Evidence on the Link between the Level of Infrastructure and Capital Inflows," CEG Working Papers 20024, Trinity College Dublin, Department of Economics. [Downloadable!]
  12. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2000. "External Capital Structure: Theory and Evidence," CEPR Discussion Papers 2583, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  13. Gordon H. HANSON, 2001. "Should Countries Promote Foreign Direct Investment?," G-24 Discussion Papers 9, United Nations Conference on Trade and Development. [Downloadable!]
  14. Mathias Hoffmann, 2002. "Cross-Country Evidence on the Link between the Level of Infrastructure and Capital Inflows," Trinity Economics Papers 200210, Trinity College Dublin, Department of Economics. [Downloadable!]
  15. Joël van der Weele, 2005. "Financing development: debt versus equity," DNB Working Papers 038, Netherlands Central Bank, Research Department. [Downloadable!]
  16. Anita Giselle Doraisami, 2007. "Financial crisis in Malaysia: did FDI flows contribute to vulnerability?," Journal of International Development, John Wiley & Sons, Ltd., vol. 19(7), pages 949-962. [Downloadable!]
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