International Investment, Political Risk, and Growth
Following substantial policy reforms in many countries, the past decade has been characterized by a remarkable increase of long-term private capital flows to the developing world. However, the bulk of these investments has concentrated on a few economies
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INTERNATIONAL INVESTMENT, POLITICAL RISK, AND GROWTH
by
Philipp Harms University of Konstanz Germany
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Springer Science+Business Media, LLC
Library of Congress Cataloging-in-Publication Data Harms, Philipp. International investment, political risk, and growth / by Philipp Harms p.cm. Based on the author's doctoral thesis, submitted to the University of St. Gallen, Switzerland. Includes bibliographical references and index. ISBN 978-1-4613-7039-0 ISBN 978-1-4615-4521-7 (eBook) DOI 10.1007/978-1-4615-4521-7 1. Investments, Foreign. 2. Country risk. 3. Economic development. 1. Title. HG4538 .H333 2000 332.67'3--dc21
00-028740
Copyyright II) 2000 Springer Science+Business Media New York Origina11y published by Kluwer Academic Publishers, New York in 2000 Softcover reprint ofthe hardcover Ist edition 2000 AII rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo-copying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+Business Media, LLC .
Printed on acidlree paper.
To Claudia
Contents
List of Figures List of Tables Acknowledgements Chapter 1: Introduction 1.1 General Motivation and Objectives 1.2 Original Contributions 1.3 Structure of the Book
Xl
xiii xv 1 1 3 4
Chapter 2: Unstable Growth and International Investment: Empirical Evidence and Literature Survey 2.1 "Meltdowns" and "Plains": The Instability of Developing Countries' Growth Rates 2.2 Theoretical Explanations of Developing Countries' Growth Performance 2.2.1 Deterministic Growth Models 2.2.2 Stochastic Models 2.3 International Capital Markets and Growth 2.3.1 International Capital Markets and Development Traps 2.3.2 The Diversification Motive for International Investment 2.3.3 International Diversification and Growth 2.4 Chapter Summary Notes
13 13 15 16 16 17 18 21 23
Chapter 3: Stochastic Growth, Poverty Traps, and International Investment 3.1 Financial Institutions and Growth 3.2 The Closed Economy
25 25 27
9 9
viii
Contents
3.2.1 Firms 3.2.2 Individuals 3.2.3 Evolution of the Capital Stock in the Closed Economy 3.3 The Open Economy 3.3.1 Investment Decisions 3.3.2 Evolution of the Open Economy 3.3.2.1 Asymptotic Results 3.3.2.2 Results for a Finite Capital Stock 3.3.3 A Numerical Example 3.4 Chapter Summary 3.5 Appendices Appendix 3.A: Proof of Proposition 3.1 Appendix 3.B: Terms of Trade Shocks and International Diversification Appendix 3.C: A Comparison of Saving Rates in Autarky and in the Open Economy Notes Chapter 4: The Evidence on International Investment and Political Risk 4.1 Private Foreign Investment in Developing Countries 4.2 Theoretical Puzzles and Solutions 4.2.1 The Neoclassical Model 4.2.2 Alternative Growth Models 4.3 Capital Market Integration and Segmentation 4.4 Existing Barriers and Political Risk 4.4.1 The Role of Existing Barriers 4.4.2 Political Risk: Definition and Historical Evidence 4.5 Does Political Risk Matter for International Investment? A Litera
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