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Institutions and the External Capital Structure of Countries

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Author Info
André Lince de Faria
Paolo Mauro

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Abstract

A widespread view holds that countries that finance themselves through foreign direct investment (FDI) and portfolio equity, rather than bonds and loans, are less prone to crises. But what determines countries' external capital structures? In a cross section of emerging markets and developing countries, we find that equity-like liabilities (FDI and, especially, portfolio equity) as a share of countries' total external liabilities (or as a share of GDP) are positively and significantly associated with indicators of educational attainment, natural resource abundance, and especially, institutional quality. These relationships are robust to attempts to control for possible endogeneity, suggesting that better institutional quality may help improve countries' capital structures. The results might also provide an explanation for the observed correlation between institutional quality and the frequency of crises.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/236.

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Length: 30 pages
Date of creation: 04 Jan 2005
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Handle: RePEc:imf:imfwpa:04/236

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Keywords: Foreign investment ; External debt ; Capital formation ; Emerging markets ; Developing countries ;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  22. Marcos Chamon & Eduardo Borensztein & Olivier Jeanne & Paolo Mauro & Jeromin Zettelmeyer, 2005. "Sovereign Debt Structure for Crisis Prevention," IMF Occasional Papers 237, International Monetary Fund.
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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. Prasad, Eswar & Rajan, Raghuram G., 2008. "A Pragmatic Approach to Capital Account Liberalization," IZA Discussion Papers 3475, Institute for the Study of Labor (IZA). [Downloadable!]
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  2. Gian Maria Milesi-Ferretti & Philip R. Lane, 2006. "Capital Flows to Central and Eastern Europe," IMF Working Papers 06/188, International Monetary Fund. [Downloadable!]
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  3. Christian Daude & Marcel Fratzscher, 2007. "The pecking order of cross-border investment," CGFS Papers chapters, in: Bank for International Settlements (ed.), Research on global financial stability: the use of BIS international financial statistics, volume 29, pages 53-89 Bank for International Settlements. [Downloadable!]
    Other versions:
  4. S. Nuri Erbas & Abbas Mirakhor, 2007. "The Equity Premium Puzzle, Ambiguity Aversion, and Institutional Quality," IMF Working Papers 07/230, International Monetary Fund. [Downloadable!]
  5. repec:bep:glecon:7:2007:3:3 is not listed on IDEAS
  6. Pierre-Guillaume Méon & Khalid Sekkat, 2007. "Revisiting the Relationship between Govenance and Foreign Direct Investment," Working Papers DULBEA 07-13.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
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  7. Andrei A. Levchenko & Paolo Mauro, 2006. "Do Some Forms of Financial Flows Help Protect from Sudden Stops?," IMF Working Papers 06/202, International Monetary Fund. [Downloadable!]
  8. Fratzscher, Marcel & Imbs, Jean, 2007. "Risk Sharing, Finance and Institutions in International Portfolios," CEPR Discussion Papers 6496, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. 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!]
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  10. André Faria & Martín Minnoni & Aleksandar Zaklan & Paolo Mauro, 2006. "The External Financing of Emerging Market Countries: Evidence from Two Waves of Financial Globalization," IMF Working Papers 06/205, International Monetary Fund. [Downloadable!]
  11. Corinne Deléchat & Smita Wagh & Gustavo Ramirez & John Wakeman-Linn, 2009. "Sub-Saharan Africa's Integration in the Global Financial Markets," IMF Working Papers 09/114, International Monetary Fund. [Downloadable!]
  12. Calderon, Cesar & Kubota, Megumi, 2009. "Does higher openness cause more real exchange rate volatility ?," Policy Research Working Paper Series 4896, The World Bank. [Downloadable!]
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