Developing Countries' Attractiveness for Foreign Direct Investment - Debt Overhang and Sovereign Risk as Major Impediments?

Peter Nunnenkamp


With declining debt inflows, foreign direct investment (FDI)
has again become one of the major pillars of private financial flows to
developing countries (Des). This has created some expectation to replace
private bank olending by FDI. However, many heavily indebted countries
may not only be constrained in terms of new private lending, but also in
terms of FDI inflows. In order to overcome constraints in the supply of
FDI, the determinants of FDI flows have to be identified in the first
place. This has been done by the Kiel Institute of World Economics in a
comprehensive study commissioned by the World Bank. The present paper
summarizes some of the major results for details, see Agarwal et aZ.
(1991). The focus is on the impact of sovereign risk on FDI and on
possible disincentives for FDI arising from a debt overhang, i.e. on
those aspects that reflect the most important recent changes in
international capital market conditions. The empirical analysis
concentrates on the 1980s. Regressions are run for an overall sample of
about 35 host Des and for various subgroups. The paper is organized as
follows. Section II presents the major hypotheses. The empirical results
are summarized in Sections III and IV. Finally, some policy conclusions
are drawn in Section V.

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