Institutions and the external capital structure of countries

Abstract

A widespread view holds that countries that finance themselves through foreign direct investment and portfolio equity, rather than bonds and loans, are less prone to crises. But what determines countries' external capital structures? In a cross-section of advanced economies, emerging markets, and developing countries, we find that equity-like liabilities as a share of countries' total external liabilities are positively and significantly associated with indicators of educational attainment, openness, natural resource abundance and, especially, institutional quality. These relationships are robust to attempts to control for possible endogeneity, suggesting that better institutional quality may help improve countries' external capital structures.