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Sovereign Risk, Fdi Spillovers, And Economic Growth

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Author Info
Fidel Pérez Sebastián () (Universidad de Alicante)
Lilia Maliar () (Universidad de Alicante)
Serguei Maliar (Universidad de Alicante)

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Abstract

This paper studies the effect of sovereign risk on capital flows from rich to poor nations in the context of a two-country model where Foreign Direct Investment (FDI) creates positive externalities in domestic production. We show that if externalities are large, a developing country never expropriates foreign assets, and behaves as under perfect enforcement of foreigners' property rights, jumping to the steady state in one period. If externalities are absent, a developing country always expropriates foreign assets and, then, there are no capital flows in equilibrium, as occurs in autarky. If externalities are of a medium size, our model can account for scarce capital flows from rich to poor nations, as well as other key features of the data, such as rising-over-time patterns of foreign capital and FDI in developing countries. In addition, the model offers an economic rationale for the FDI restrictions observed across nations.

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Publisher Info
Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2005-27.

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Length: 29 pages
Date of creation: Sep 2005
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Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2005-27

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Related research
Keywords: Sovereign risk Foreign direct investment Externalities Incentive compatibility

Find related papers by JEL classification:
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
F15 - International Economics - - Trade - - - Economic Integration
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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(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. Alexandre Dmitriev, 2006. "Technological Transfers, Limited Commitment and Growth," Computing in Economics and Finance 2006 248, Society for Computational Economics. [Downloadable!]
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