NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Capital Flows, Foreign Direct Investment, and Debt-Equity Swaps in Developing Countries

Sebastian Edwards

NBER Working Paper No. 3497 (Also Reprint No. r1712)
Issued in May 1992
NBER Program(s):   ITI   IFM

One of the nest serious consequences of the debt crisis of 1982 has been the reduction in the accessibility to the world capital market for most developing countries. This situation has proved to be particularly serious for Latin American nations. At this juncture, a key question is how to improve the LLCs attractiveness for foreign capital flows. In this paper I explore the role of two potential sour of additional private capital inflows: increased direct foreign investment, and the debt-conversion mechanisms. The paper presents the results from an economic analysis of the determinants of the cross-country distribution of the OECD direct foreign investment (DFI) into the LDCs. Particular emphasis is given to assessing the relative importance of political variables of the recipient countries. The role of the debt-equity swaps as investments for reducing the extreme debt burden is also investigated, using the recent Chilean experience with these mechanisms as a case-study.

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Published: Capital Flows in the World Economy, edited by Horst Siebert, pp. 255-281. Tubingen: J.C.B. Mohr, 1991.

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