Sovereign Risk, FDI Spillovers, and Growth
This paper studies the effect of sovereign risk on capital flows from rich to poor nations in the context of a two-country model, where Foreign Direct Investment (FDI) creates positive externalities in domestic production. We show that if externalities are large, a developing country never expropriates foreign assets, and behaves as under perfect enforcement of foreigners' property rights, jumping to the steady state in one period. If externalities are absent, a developing country always expropriates foreign assets and, then, there are no capital flows in equilibrium, as occurs in autarky. If externalities are of a medium size, our model can account for scarce capital flows from rich to poor nations, as well as other key features of the data, such as rising-over-time patterns of foreign capital and FDI in developing countries. In addition, the model offers an economic rationale for the FDI restrictions observed across nations. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd.
Year of publication: |
2008
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Authors: | Maliar, Lilia ; Maliar, Serguei ; Sebastián, Fidel Pérez |
Published in: |
Review of International Economics. - Wiley Blackwell, ISSN 0965-7576. - Vol. 16.2008, 3, p. 463-477
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Publisher: |
Wiley Blackwell |
Saved in:
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