ISSN: 2056-3736 (Online Version) | 2056-3728 (Print Version)

External Debt Default and Foreign Direct Investments

Nachiket Thakkar and Kiran Ambreen Ayub

Correspondence: Nachiket Thakkar,

Department of Accounting and Finance, Alabama A&M University, Huntsville

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We analyze the effect of a country’s defaults and restructuring its’ official and private external debt on its ability to attract foreign direct investment. We use different types of foreign direct investments: FDI Flows, Horizontal FDI, vertical FDI, cross-border mergers & acquisitions, and greenfield FDI. Using the Poisson-Pseudo Maximum Likelihood (PPML) estimation method, which has never been used in the literature to do a similar analysis, we find that external debt default decreases all types of FDIs. Furthermore, we also conduct a more granular sensitivity analysis by analyzing the effect of political risk ratings, effect on non-advanced economies, and effect on highly indebted poor countries (HIPC). We find that cross-border mergers and acquisitions (M&A) decrease as corruption risk decreases and increases as law and order improve. For HIPC countries, official external debt restructuring increases greenfield FDI.


  Debt Default, Restructuring, Foreign Direct Investment (FDI), External Debt, ICRG, Poisson-Pseudo Maximum Likelihood (PPML), Political Risk.


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