ABSTRACT
Policy makers in emerging economies choose the forms by which foreign investors can participate in the domestic economy. Implicit in this choice are the benefits and costs of each form of external capital inflow. Three distinctions are important in determining the risks and constraints of each form of capital inflow. First, the maturity structure determines whether the creditor has the option to refuse renewing credits. Second, the risk sharing nature of debt and equity contracts is different. While payments are required under good and bad states of nature for debt contracts, equity holders only receive the residual claim on the earnings of the company. Finally, official, multilateral and private sector lenders may have different motivations and allow for different uses of credits. While official lenders have political motivations and multilateral creditors have economic development goals, private lenders may only be interested in the profitability and repayment of the loan.
