| Abstract: | This research examines the contention that foreign investment is positively related to external public debt accumulation by Third World states. Three hypotheses are examined: (1) that flows of foreign investment are negatively related to increased debt over the short-run; (2) that stocks of foreign investments are positively related over the long-run and (3) that the effects of foreign investment should differ according to their sectoral location, with higher investments in manufacturing producing greater borrowing, and investments in extraction being unrelated to debt accumulation. The results show that stocks of investments in manufacturing are strongly related to borrowing only among American states, with the effects being immediate, and not long-term. Only African states were affected by flows, with these effects being long-term and positive. Extraction investments were not related to debt accumulation. These findings indicate that the mechanism by which foreign investments affect debt accumulation varies from region to region. The repatriation of profits and local borrowing by foreigners appears to have the greatest impact among American states, while attempts to maintain foreign-induced growth is the key effect in Africa. |
