Institutions and the External Capital Structure of Countries
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Summary:
A widespread view holds that countries that finance themselves through foreign direct investment (FDI) and portfolio equity, rather than bonds and loans, are less prone to crises. But what determines countries' external capital structures? In a cross section of emerging markets and developing countries, we find that equity-like liabilities (FDI and, especially, portfolio equity) as a share of countries' total external liabilities (or as a share of GDP) are positively and significantly associated with indicators of educational attainment, natural resource abundance, and especially, institutional quality. These relationships are robust to attempts to control for possible endogeneity, suggesting that better institutional quality may help improve countries' capital structures. The results might also provide an explanation for the observed correlation between institutional quality and the frequency of crises.
Series:
Working Paper No. 2004/236
Subject:
Balance of payments Bank credit Education Environment Financial institutions Foreign direct investment Money Natural resources Stocks
English
Publication Date:
December 1, 2004
ISBN/ISSN:
9781451875713/1018-5941
Stock No:
WPIEA2362004
Pages:
31
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