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Does co-financing by multilateral development banks increase "risky" direct investment in emerging markets?

Listed author(s):
  • Wezel, Torsten
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    The paper discusses the question of whether financial participation of multilateral development banks does prompt private investors to inject more risky equity capital in emerging market banks. Using a theoretical model, it is stipulated that the presence of an official lender in a project gives the recipient country a stronger economic incentive to honor its contractual obligations instead of possibly restricting access to the investment position. An innovative endogenous variable measuring the amount of invested equity capital which, given a country's historical risk profile, can be considered "at risk" is tested in the empirical investigation. The observed outcome for the group of investors receiving co-financing by the International Finance Corporation (IFC) and/or the European Bank for Reconstruction and Development (EBRD) is related – applying a propensity score matching approach using information on the characteristics of non-participants – to the amount these firms would have invested had they not been selected for official support. The econometric results show that the "treatment effect" is significantly positive as stipulated. That is, in the German case financial participation of multilateral agencies in investment projects did have a positive impact on the risk exposure that investors were willing to bear.

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    File URL: https://www.econstor.eu/bitstream/10419/19469/1/200402dkp.pdf
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    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2004,02.

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    Date of creation: 2004
    Handle: RePEc:zbw:bubdp1:1543
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    1. Asiedu, Elizabeth & Villamil, Anne P., 2002. "Imperfect Enforcement, Foreign Investment, And Foreign Aid," Macroeconomic Dynamics, Cambridge University Press, vol. 6(04), pages 476-495, September.
    2. Almus, Matthias & Czarnitzki, Dirk, 2003. "The Effects of Public R&D Subsidies on Firms' Innovation Activities: The Case of Eastern Germany," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(2), pages 226-236, April.
    3. Mavrotas, George, 2002. "Multilateral Development Banks and Private Sector Financing: The Case of IFC," WIDER Working Paper Series 118, World Institute for Development Economic Research (UNU-WIDER).
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    7. Jonathan Thomas & Tim Worrall, 1994. "Foreign Direct Investment and the Risk of Expropriation," Review of Economic Studies, Oxford University Press, vol. 61(1), pages 81-108.
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    9. Barbara Sianesi, 2001. "Propensity score matching," United Kingdom Stata Users' Group Meetings 2001 12, Stata Users Group, revised 23 Aug 2001.
    10. Asiedu, Elizabeth & Villamil, Anne P., 2000. "Discount Factors And Thresholds: Foreign Investment When Enforcement Is Imperfect," Macroeconomic Dynamics, Cambridge University Press, vol. 4(01), pages 1-21, March.
    11. repec:cup:macdyn:v:4:y:2000:i:1:p:1-21 is not listed on IDEAS
    12. Reuven Glick & Ramon Moreno & Mark M. Spiegel, 2001. "Financial crises in emerging markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar.23.
    13. Stéphane Pallage & Michel A. Robe, 2003. "Leland & Pyle Meet Foreign Aid? Adverse Selection and the Procyclicality of Financial Aid Flows," Cahiers de recherche 0327, CIRPEE.
    14. Barth, James R.*Caprio,Gerard*Levine, Ross, 2001. "The regulation and supervision of banks around the world - a new database," Policy Research Working Paper Series 2588, The World Bank.
    15. David A. Grigorian, 2003. "On the Determinants of First-Time Sovereign Bond Issues," IMF Working Papers 03/184, International Monetary Fund.
    16. Eaton, Jonathan & Gersovitz, Mark, 1984. "A Theory of Expropriation and Deviations from Perfect Capital Mobility," Economic Journal, Royal Economic Society, vol. 94(373), pages 16-40, March.
    17. Assaf Razin & Efraim Sadka & Chi-Wa Yuen, 1999. "Excessive FDI flows under asymmetric information," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
    18. Stefan Krasa & Anne P. Villamil, 2000. "Optimal Contracts when Enforcement Is a Decision Variable," Econometrica, Econometric Society, vol. 68(1), pages 119-134, January.
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