International Trade and Finance: A North American Perspective

By Khosrow Fatemi | Go to book overview

14
FOREIGN DIRECT INVESTORS' LOCAL BORROWING: AN ANALYSIS OF THE CONSEQUENCES IN LESS DEVELOPED COUNTRIES DIFFERENTIATED BY INCOME LEVEL

ZEWDINEH ASSEFA


INTRODUCTION

Developing countries import long-term capital to finance economic development. 1 Lately, the suggestion has been made that not all foreign direct investments are beneficial to less developed countries (LDCs), 2 and not all the capital used by the foreign investors in LDCs is raised abroad. Instead, foreign direct investors are known to have borrowed locally. 3

In this chapter we discuss the extent and implications of local borrowing by foreign direct investors in the financial and credit markets of host economies. The study is empirical in nature, using time-series cross-country regression analysis. In the second section the methodology and data sources used are presented. This is followed by the statistically testable proposition in the third section. The results are summarized in the fourth section. The chapter concludes with a summary of the findings and their policy implications.


METHODOLOGY

The present study uses pooled cross-sectional and time-series data operationalized for a multiple regression procedure based on the following generalized model:

Yit = B1Xit,1 + B2Xit,2 . . . BkXit,k + Eit (14.1)

where Y stands for the dependent variable; X represents the independent variable; E is the random disturbance, with E(e) = 0; and B is the coefficient parameter, with i = 1, 2, . . . T; and x = 1 for all i and t values. This means that sample data are reflected by observations on N cross-section

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