Institutions and the External Capital Structure of Countries

December 1, 2004

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Format: Chicago

Paolo Mauro, and Andre Faria. Institutions and the External Capital Structure of Countries, (USA: International Monetary Fund, 2004) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Balance of payments, Bank credit, Education, Environment, Financial institutions, Foreign direct investment, Money, Natural resources, Stocks

Keywords: Bank credit, Equity, Equity finance, Equity to FDI, External debt, External liabilities, FDI flow, FDI share, Foreign direct investment, GDP, Natural resources, Portfolio, Portfolio debt, Portfolio equity, Stocks, Total equity, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/236
Stock No:

WPIEA2362004
ISBN:

9781451875713
ISSN:

1018-5941

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