Institutions and the External Capital Structure of Countries

31 Pages Posted: 9 Feb 2006

See all articles by Andre Faria

Andre Faria

International Monetary Fund (IMF) - Research Department

Paolo Mauro

International Monetary Fund (IMF)

Date Written: December 2004

Abstract

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.

Keywords: Foreign direct investment, portfolio equity, external debt, external liabilities

JEL Classification: F21, F34, F36

Suggested Citation

Faria, Andre Lince De and Mauro, Paolo, Institutions and the External Capital Structure of Countries (December 2004). IMF Working Paper No. 04/236, Available at SSRN: https://ssrn.com/abstract=879061

Andre Lince De Faria (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Paolo Mauro

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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