Sovereign Risk, FDI Spillovers, and Growth

Authors

  • Lilia Maliar,

    Corresponding author
    1. Dpto. Fundamentos del Análisis Económico, Universidad de Alicante, Spain
    Search for more papers by this author
  • Serguei Maliar,

    Corresponding author
    1. Dpto. Fundamentos del Análisis Económico, Universidad de Alicante, Spain
    Search for more papers by this author
  • Fidel Pérez Sebastián

    Corresponding author
    1. Dpto. Fundamentos del Análisis Económico, Universidad de Alicante, Spain
    Search for more papers by this author
    • We thank an anonymous referee for useful comments. This research was partially supported by the Instituto Valenciano de Investigaciones Económicas (IVIE), Generalitat Valenciana and the Ministerio de Educación, Cultura y Deporte under the grant SEJ2004-08011ECON. Lilia Maliar and Serguei Maliar also aknowledge financial support from the the Ramón y Cajal program of the Ministerio de Educación, Cultura y Deporte.


Maliar, Maliar, Pérez Sebastián: Dpto. Fundamentos del Análisis Económico, Universidad de Alicante, Campus de San Vicente, 03080, Spain. Tel: +34 965903400 (ext 3234); Fax: +34 965903898; E-mail: fidel@merlin.fae.ua.es.

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.

Ancillary