Sovereign risk, FDI spillovers, and growth

Sebastián, Fidel Pérez; Maliar, Lilia; Maliar, Serguei

Abstract

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.

Citation

Sebastián, F. P., Maliar, L., & Maliar, S. (2008). Sovereign risk, FDI spillovers, and growth. Review of International Economics, 16(3), 463-477. https://doi.org/10.1111/j.1467-9396.2007.00718.x

• Journal Article Type: Article
• Acceptance Date: Jan 1, 2008
• Online Publication Date: Mar 3, 2008
• Publication Date: 2008-08
• Deposit Date: Nov 13, 2014
• Journal: Review Of International Economics
• Print ISSN: 0965-7576
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 16
• Issue: 3
• Pages: 463-477
• DOI: https://doi.org/10.1111/j.1467-9396.2007.00718.x
• Keywords: Geography, Planning and Development; Development
• Public URL: https://hull-repository.worktribe.com/output/469576
• Publisher URL: https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-9396.2007.00718.x
• Contract Date: Nov 13, 2014