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

27 Pages Posted: 24 Apr 2002

See all articles by Monika Schnitzer

Monika Schnitzer

University of Munich - Department of Economics; Centre for Economic Policy Research (CEPR)

Abstract

The paper compares the two standard forms of international investment in developing countries, debt and foreign direct investment (FDI), from a finance perspective. The sovereign risks associated with debt finance are shown to be generally less severe than the ones that come with 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, Debt V. Foreign Direct Investment: The Impact of Sovereign Risk on the Structure of International Capital Flows. Economica, Vol. 69, pp. 41-67, 2002. Available at SSRN: https://ssrn.com/abstract=308889

Monika Schnitzer (Contact Author)

University of Munich - Department of Economics ( email )

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Munich, D-80539
Germany
+49 89 2180 2217 (Phone)
+49 89 2180 2767 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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