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Institutions and the External Capital Structure of Countries

Author/Editor: Faria, André | Mauro, Paolo
Authorized for Distribution: December 1, 2004
Electronic Access: Free Full Text (PDF file size is 402KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

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.
 
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Series: Working Paper No. 04/236
Subject(s): Foreign investment | External debt | Capital formation | Emerging markets | Developing countries
Author's keyword(s): Foreign direct investment | porfolio equity | external debt | external liabilities
 
English  
    Published:   December 1, 2004        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2362004   Pages:   30
    Price:   US$15.00 (Academic Rate: US$15.00 )
       
     
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