[Publisher:] Institut für Weltwirtschaft (IfW) [Place:] Kiel [Year:] 1988
Kiel Working Paper No. 344
The persistence of the.international debt crisis has given rise to considerations that foreign direct investment (FDD should play a larger role in the financing of less developed countries (LDCs) in the future. FDIs may provide external financing for developing countries even in times when new lending is restricted due to high credit risks. Flexible payment schedules and the extended property rights may differentiate FDIs from international loans and provide shelter against high country risks. However, FDIs are subject to sovereign risk as well. The option of sovereign states to defer loan repayments as soon as the.costs of contract fulfillment exceed the benefits has its counterpart in expropriations of FDI. The potential of substituting FDI for debt depends on the attitude of the LDCs1 governments towards FDI. A larger role for FDI, especially in times of restricted new lending, will only be possible if the political and economic situation of the borrowing country that induces creditors to expect a higher risk of willful default does not increase the risk of expropriations at the same time.