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External Debt Default and Foreign Direct Investments

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  • Nachiket Thakkar
  • Kiran Ambreen Ayub

Abstract

We analyze the effect of a country’s defaults and restructuring its’ official and private external debt on its ability to attract foreign direct investment. We use different types of foreign direct investments: FDI Flows, Horizontal FDI, vertical FDI, cross-border mergers & acquisitions, and greenfield FDI. Using the Poisson-Pseudo Maximum Likelihood (PPML) estimation method, which has never been used in the literature to do a similar analysis, we find that external debt default decreases all types of FDIs. Furthermore, we also conduct a more granular sensitivity analysis by analyzing the effect of political risk ratings, effect on non-advanced economies, and effect on highly indebted poor countries (HIPC). We find that cross-border mergers and acquisitions (M&A) decrease as corruption risk decreases and increases as law and order improve. For HIPC countries, official external debt restructuring increases greenfield FDI.

Suggested Citation

  • Nachiket Thakkar & Kiran Ambreen Ayub, 2022. "External Debt Default and Foreign Direct Investments," Bulletin of Applied Economics, Risk Market Journals, vol. 9(2), pages 223-237.
    • Handle: RePEc:rmk:rmkbae:v:9:y:2022:i:2:p:223-237
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    References listed on IDEAS

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    More about this item

    Keywords

    Debt Default; Restructuring; Foreign Direct Investment (FDI); External Debt; ICRG; Poisson-Pseudo Maximum Likelihood (PPML); Political Risk.;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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