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Sovereign Risk, Fdi Spillovers, And Economic Growth

  • Fidel Pérez Sebastián

    ()

    (Universidad de Alicante)

  • Lilia Maliar

    ()

    (Universidad de Alicante)

  • Serguei Maliar

    (Universidad de Alicante)

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
File Function: Fisrt version / Primera version, 2005
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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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  1. Jonathan Eaton & Mark Gersovitz, 1982. "A Theory of Expropriation and Deviations From Perfect Capital Mobility," NBER Working Papers 0972, National Bureau of Economic Research, Inc.
  2. Daniel Cohen & Jeffrey Sachs, 1991. "Growth and External Debt Under Risk of Debt Repudiation," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 437-472 National Bureau of Economic Research, Inc.
  3. Albert Marcet & Ramon Marimon, 1991. "Communication, commitment and growth," Economics Working Papers 1, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  5. Kiminori Matsuyama, 1990. "Increasing Returns, Industrialization and Indeterminacy of Equilibrium," Discussion Papers 878, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Schmidt, Klaus M., 2000. "The political economy of mass privatization and the risk of expropriation," European Economic Review, Elsevier, vol. 44(2), pages 393-421, February.
  7. Aart Kraay & Norman Loayza & Luis Serven & Jaume Ventura, 2000. "Country Portfolios," NBER Working Papers 7795, National Bureau of Economic Research, Inc.
  8. Thomas, Jonathan & Worrall, Tim, 1994. "Foreign Direct Investment and the Risk of Expropriation," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 81-108, January.
  9. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier.
  10. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
  11. Barro, R. & Mankiw, G., 1992. "Capital Mobility in Neoclassical Models of Growth," Harvard Institute of Economic Research Working Papers 1615, Harvard - Institute of Economic Research.
  12. Jonathan E. Haskel & Sonia C. Pereira & Matthew J. Slaughter, 2007. "Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms?," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 482-496, August.
  13. 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.
  14. 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.
  15. Gertler, Mark & Rogoff, Kenneth, 1990. "North-South lending and endogenous domestic capital market inefficiencies," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 245-266, October.
  16. 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.
  17. 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.
  18. Gorg, Holger & Strobl, Eric, 2001. "Multinational Companies and Productivity Spillovers: A Meta-analysis," Economic Journal, Royal Economic Society, vol. 111(475), pages F723-39, November.
  19. Kobrin, Stephen J., 1980. "Foreign enterprise and forced divestment in LDCs," International Organization, Cambridge University Press, vol. 34(01), pages 65-88, December.
  20. Stijn Claessens & Daniel Oks & Rossana Polastri, 2000. "Capital Flows to Central and Eastern Europe and the Former Soviet Union," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 299-339 National Bureau of Economic Research, Inc.
  21. Findlay, Ronald, 1978. "Relative Backwardness, Direct Foreign Investment, and the Transfer of Technology: A Simple Dynamic Model," The Quarterly Journal of Economics, MIT Press, vol. 92(1), pages 1-16, February.
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