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Foreign capital inflows: direct investment, equity investment, and foreign debt

Author

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  • Keunsuk Chung

Abstract

We develop a two-country stochastic growth model with production, relative price and sovereign default risks. Domestic production and relative price volatilities cause more fluctuations in the agents' portfolio decisions than the volatility of Foreign Direct Investment (FDI) production does. Both the sovereign risk and separability of FDI capital affect the composition of foreign capital inflows in two directions. The direct effect induces substitution of FDI for more Foreign Portfolio Investment (FPI) and foreign borrowing, while the indirect effect encourages FDI due to the increase in FDI's marginal contribution to the foreign agent's welfare after default.

Suggested Citation

  • Keunsuk Chung, 2009. "Foreign capital inflows: direct investment, equity investment, and foreign debt," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 2(1), pages 86-105.
    • Handle: RePEc:ids:ijepee:v:2:y:2009:i:1:p:86-105
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    Cited by:

    1. Zahir Mohamed Omar & Mohamed Isse Ibrahim, 2021. "Determinants of External Debt: The Case of Somalia," Asian Development Policy Review, Asian Economic and Social Society, vol. 9(1), pages 33-43, March.

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