Title: Foreign capital inflows: direct investment, equity investment, and foreign debt

Authors: Keunsuk Chung

Addresses: School of Business Administration, E-355 Olmsted Bldg., 777 W. Harrisburg Pike, Penn State Harrisburg, Middletown, PA 17057, USA

Abstract: We develop a two-country stochastic growth model with production, relative price and sovereign default risks. Domestic production and relative price volatilities cause more fluctuations in the agents| portfolio decisions than the volatility of Foreign Direct Investment (FDI) production does. Both the sovereign risk and separability of FDI capital affect the composition of foreign capital inflows in two directions. The direct effect induces substitution of FDI for more Foreign Portfolio Investment (FPI) and foreign borrowing, while the indirect effect encourages FDI due to the increase in FDI|s marginal contribution to the foreign agent|s welfare after default.

Keywords: FDI; foreign direct investment; foreign equity investment; inelastic debt supply; volatility; economic policy; emerging economies; foreign debt; foreign portfolio investment.

DOI: 10.1504/IJEPEE.2009.022943

International Journal of Economic Policy in Emerging Economies, 2009 Vol.2 No.1, pp.86 - 105

Published online: 04 Feb 2009 *

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