Financial Openness and Growth in Developing Countries: Why Does the Type of External Financing Matter?

Brahim Gaies and Mahmoud-Sami Nabi2 ()
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Mahmoud-Sami Nabi2: LEGI-Tunisia Polytechnic School, Tunisia, FSEG Nabeul, University of Carthage, Tunisia, Postal: Professor, LEGI-Tunisia Polytechnic School, FSEG Nabeul, University of Carthage
Authors registered in the RePEc Author Service: Mahmoud Sami NABI

Journal of Economic Integration, 2019, vol. 34, issue 3, 426-464

Abstract: This study examines how external financing (EF) affects growth in developing countries by distinguishing between two forms of external financing: debt and foreign direct investment (FDI). We show that both types favor growth by boosting investment through the credit channel. However, excessive external debt increases vulnerability to financial crises. Contrariwise, FDI plays an amortizing role by reducing a crisis’ effects. The empirical evidence confirms these results and demonstrates that, despite the more secure nature of FDI, mixed financing (debt and FDI) remains more profitable for developing countries because of the inverted U-shaped growth effect of the FDI-to-debt ratio. Moreover, exchange rate stability decreases vulnerability to financial crises, whereas higher stability turns into exchange rate rigidity and thus increases crisis occurrence.

Keywords: External debt; FDI; Financial crisis; Exchange rate rigidity (search for similar items in EconPapers)
JEL-codes: C02 C58 F41 G15 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0777

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