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Is FDI a Safer Form of Financing?

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  • Eduardo Fernández-Arias

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  • Ricardo Hausmann

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.

Suggested Citation

  • Eduardo Fernández-Arias & Ricardo Hausmann, 2000. "Is FDI a Safer Form of Financing?," Research Department Publications 4201, Inter-American Development Bank, Research Department.
  • Handle: RePEc:idb:wpaper:4201
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    Cited by:

    1. M. Olufemi Saibu, 2012. "An analysis of causal nexus between foreign direct investment, exchange rate and financial market development in Nigeria (1970 to 2009)," African Journal of Economic and Sustainable Development, Inderscience Enterprises Ltd, vol. 1(1), pages 95-102.
    2. Sula, Ozan & Willett, Thomas D., 2009. "The reversibility of different types of capital flows to emerging markets," Emerging Markets Review, Elsevier, vol. 10(4), pages 296-310, December.
    3. Mathias Hoffmann, 2003. "Cross-country evidence on the link between the level of infrastructure and capital inflows," Applied Economics, Taylor & Francis Journals, vol. 35(5), pages 515-526.
    4. Philip R. Lane & Gian M Milesi-Ferretti, 2000. "External Capital Structure; Theory and Evidence," IMF Working Papers 00/152, International Monetary Fund.
    5. Michael D. Bordo & Marc Flandreau, 2003. "Core, Periphery, Exchange Rate Regimes, and Globalization," NBER Chapters,in: Globalization in Historical Perspective, pages 417-472 National Bureau of Economic Research, Inc.
    6. 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.
    7. Agbloyor, Elikplimi Komla & Abor, Joshua & Adjasi, Charles Komla Delali & Yawson, Alfred, 2013. "Exploring the causality links between financial markets and foreign direct investment in Africa," Research in International Business and Finance, Elsevier, vol. 28(C), pages 118-134.
    8. Ayse Imrohoroglu & Krishna B. Kumar, 2003. "Entry Costs, Intermediation, and Capital Flows," Macroeconomics 0304001, EconWPA.
    9. Ajay Shah & Ila Patnaik, 2007. "India's Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit," NBER Chapters,in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 609-644 National Bureau of Economic Research, Inc.
    10. Joel Deichmann & Socrates Karidis & Selin Sayek, 2003. "Foreign direct investment in Turkey: regional determinants," Applied Economics, Taylor & Francis Journals, vol. 35(16), pages 1767-1778.
    11. Ho, Sin-Yu & Odhiambo, Nicholas, 2017. "Analysing the Macroeconomic Drivers of Stock Market Development in the Philippines," Working Papers 23439, University of South Africa, Department of Economics.
    12. Rabin Hattari & Ramkishen S. Rajan, 2011. "How Different are FDI and FPI Flows?: Does Distance Alter the Composition of Capital Flows?," Working Papers 092011, Hong Kong Institute for Monetary Research.
    13. Gordon H. HANSON, 2001. "Should Countries Promote Foreign Direct Investment?," G-24 Discussion Papers 9, United Nations Conference on Trade and Development.
    14. 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.
    15. Ho, Sin-Yu & Odhiambo, Nicholas, 2017. "The Macroeconomic Drivers of Stock Market Development: Evidence from Hong Kong," Working Papers 23438, University of South Africa, Department of Economics.
    16. Arslan Razmi, 2005. "The Effects of Export-Oriented, FDI-Friendly Policies on the Balance of Payments in a Developing Economy: A General Equilibrium Investigation," UMASS Amherst Economics Working Papers 2005-03, University of Massachusetts Amherst, Department of Economics, revised Sep 2006.
    17. Hattari, Rabin & S. Rajan, Ramkishen, 2011. "How Different are FDI and FPI Flows?: Distance and Capital Market Integration," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 26, pages 499-525.
    18. Talamo, Giuseppina, 2010. "Corporate governance and capital flows," MPRA Paper 35853, University Library of Munich, Germany, revised 2011.
    19. WARBURTON Christopher E.S., 2014. "Time Dynamics Of Stabilization Theories And Responses To Debt And Financial Crises: An Analysis Of Mexico, Argentina, Nigeria And Ghana, 1960-2011," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 14(2).
    20. repec:spo:wpecon:info:hdl:2441/622 is not listed on IDEAS
    21. 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.
    22. Dell'Erba, Salvatore & Reinhardt, Dennis, 2015. "FDI, debt and capital controls," Journal of International Money and Finance, Elsevier, vol. 58(C), pages 29-50.
    23. Joël van der Weele, 2005. "Financing development: debt versus equity," DNB Working Papers 038, Netherlands Central Bank, Research Department.

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