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The paper compares the two standard forms of international investment in developing countries, debt and foreign direct investment (FDI), from a finance perspective. The sovereign risks associated with debt finance are shown to be generally less severe than the ones that come with FDI. FDI is chosen only if the foreign investor is more efficient in running the project, if the project is risky, and if the foreign investor has a good outside option which deters creeping expropriation. The sovereign risk problem of FDI can be alleviated if the host country and the foreign investor form a joint venture.

We investigate how bank competition affects the efficiency of credit allocation, using a model of spatial competition. Our analysis shows that bad loans are more likely the larger the number of banks competing for customers. We study further how many banks will be active if market entry is not regulated. Free entry can induce too much entry and thus too many bad loans compared to the social optimum. Finally we analyse how bank competition affects the restructuring efforts of firms. We find that restructuring has positive externalities which give rise to multiple equilibria, with either much or little restructuring activity.JEL classification: D43, G21, G34, L13, P31, P34.

Since the new German federal government has imposed tight fiscal policy restrictions on itself, a pragmatic approach is needed to finance the spending requirements of the transformation. The financing instruments mentioned in the coalition agreement appears to be suitable in principle for meeting key fiscal challenges facing the federal government in the coming years. However, they need to be quantified in concrete terms as quickly as possible and designed to ensure legal security in order to send reliable signals for the necessary capacity building, particularly in the construction industry and public administration.

AbstractThis paper examines credit constraints as one channel held responsible for hampering economic convergence between countries. Specifically, we extend a Melitz and Ottaviano type trade model with variable mark‐ups to allow for endogenous technology adoption. We consider a framework with two countries that potentially differ with respect to credit market development. Firms have the option to adopt a more efficient technology by paying some fixed cost that is more costly to finance for financially constrained firms. We find that technology adoption increases in both countries after trade liberalization but more so in the financially more developed country: the productivity gap widens. Simulations show that the welfare gap widens too. Opening up without sufficient access to external funding thus fails to promote convergence.