Does excessive debt discourage foreign direct investment in highly indebted poor countries?
This research investigates the impact of debt on FDI flows. Traditionally, the debt overhang literature has also viewed uncertain future debt payments as an implicit tax on future profits, and therefore a disincentive to new private investment, or procurement of earnings. For the most part, using a database assembled Mody and Murshid (2002), I examine the impact of indebtedness on FDI flows, to check the proposition that FDI is positively associated with the degree of indebtedness. Throughout I distinguish between countries classified as highly indebted poor countries by the World Bank and non-highly indebted poor countries. The effect of debt on the poor country growth is also explored. My findings indicate the following: (i) FDI contributes positively and significantly to GDP growth in the poor countries. This corroborates the theory that FDI facilitates GDP growth in the poor countries, more so in this case than the non-highly indebted countries. (ii) FDI does not contribute positively and significantly to savings and investment for the heavily indebted poor countries. (iii) The forms of debt considered have a negative and significant relationship to FDI flows for the highly indebted and poor countries. This finding is not as robust for the non-highly indebted countries.
Warburton, Christopher Ebun Samuel, "Does excessive debt discourage foreign direct investment in highly indebted poor countries?" (2003). ETD Collection for Fordham University. AAI3080474.