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Debt vs. Foreign Direct Investment: The Impact of Sovereign Risk on the Structure of International Capital Flows

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  • Schnitzer, Monika

Abstract

In this paper the two standard forms of international investment in developing countries – debt and foreign direct investment (FDI) – are compared from a finance perspective. We show that the sovereign risks associated with debt finance are generally less severe than those accompanying FDI. FDI is chosen only if the foreign investor is more efficient in running the project, if the project is risky and if the foreign investor has a good outside option which deters creeping expropriation. The sovereign risk problem of FDI can be alleviated if the host country and the foreign investor form a joint venture.

Suggested Citation

  • Schnitzer, Monika, 1997. "Debt vs. Foreign Direct Investment: The Impact of Sovereign Risk on the Structure of International Capital Flows," CEPR Discussion Papers 1608, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1608
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    Keywords

    Foreign Direct Investment; International Debt Crisis; Joint Ventures; Sovereign Risk;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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