The Effect of Country Default Risk on Foreign Direct Investment

Ephraim Clark and Konstantinos Kassimatis ()
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Konstantinos Kassimatis: Athens University of Economics and Business, Postal: 76 Patission str., Athens, 10434, Greece, http://www.stat-athens.aueb.gr/

Economia Internazionale / International Economics, 2009, vol. 62, issue 3, 342-361

Abstract: In this paper we use the structural credit risk methodology of Merton (1974) to estimate country default risk as the country financial risk premium for eight of the largest Latin American economies - Argentina, Bolivia, Brazil, Chile, Colombia, Mexico, Peru and Venezuela - from 1986 to 2000. We test whether and to what extent it affects the amount of foreign direct investment (FDI). We find that the lagged second difference of the financial risk premium is a significant explanatory variable that is robust with respect to the other explanatory variables, including a standard measure of country/political risk, as well as with respect to the individual countries.

Keywords: Foreign Direct Investment; Country Default Risk (search for similar items in EconPapers)
JEL-codes: C23 F30 G15 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (4)

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