LDC creditworthiness and foreign capital inflows: 1980-86

Abstract

This paper estimates the determinants of foreign capital inflows and shows that they are jointly determined with LDC creditworthiness. The paper demonstrates that foreign capital inflows respond to government restrictions and the cost of foreign transactions. Previous research, based on single-equation models, has concluded that the amount of capital inflows is a positive indicator of LDC creditworthiness. By contrast, this paper estimates a simultaneous limited-dependent variable model, in order to capture the endogeneity of capital inflows. The estimate yields a reversal in sign for the coefficient of the capital inflows variable. The paper suggests that defensive lending may explain this finding.