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

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  • Wezel, Torsten

Abstract

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.

Suggested Citation

  • Wezel, Torsten, 2004. "Does co-financing by multilateral development banks increase "risky" direct investment in emerging markets?," Discussion Paper Series 1: Economic Studies 2004,02, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp1:1543
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    File URL: https://www.econstor.eu/bitstream/10419/19469/1/200402dkp.pdf
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    References listed on IDEAS

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    Cited by:

    1. William Perraudin & Andrew Powell & Peng Yang, 2016. "Multilateral Development Bank Ratings and Preferred Creditor Status," IDB Publications (Working Papers) 94656, Inter-American Development Bank.
    2. William Perraudin & Andrew Powell & Peng Yang, 2016. "Multilateral Development Bank Ratings and Preferred Creditor Status," IDB Publications (Working Papers) 7686, Inter-American Development Bank.

    More about this item

    Keywords

    foreign direct investment; banks; emerging markets; multilateral development banks; program evaluation; propensity score matching;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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