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Sovereign Risk, Fdi Spillovers, And Economic Growth

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  • Fidel Pérez Sebastián

    ()
    (Universidad de Alicante)

  • Lilia Maliar

    ()
    (Universidad de Alicante)

  • Serguei Maliar

    (Universidad de Alicante)

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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File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2005-27.pdf
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Bibliographic 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
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2005-27

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Keywords: Sovereign risk; Foreign direct investment; Externalities; Incentive compatibility;

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  1. Claessens,Constantijn A. & Oks, Daniel & Polastri, Rossana, 1998. "Capital flows to Central and Eastern Europe and the Former Soviet Union," Policy Research Working Paper Series 1976, The World Bank.
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  17. Boyd, John H. & Smith, Bruce D., 1997. "Capital Market Imperfections, International Credit Markets, and Nonconvergence," Journal of Economic Theory, Elsevier, vol. 73(2), pages 335-364, April.
  18. Mattoo, Aaditya & Olarreaga, Marcelo & Saggi, Kamal, 2004. "Mode of foreign entry, technology transfer, and FDI policy," Journal of Development Economics, Elsevier, vol. 75(1), pages 95-111, October.
  19. Cole, Harold L & Kehoe, Patrick J, 1998. "Models of Sovereign Debt: Partial versus General Reputations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 55-70, February.
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Cited by:
  1. Alexandre Dmitriev, 2006. "Technological Transfers, Limited Commitment and Growth," Computing in Economics and Finance 2006 248, Society for Computational Economics.

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