© 1993 International Bank for Reconstruction and Development / The World Bank
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ALTERNATIVE FORMS OF EXTERNAL FINANCE: A SURVEY
For many developing countries, alternative forms of external finance—all forms of finance that are not guaranteed by or mediated through the public sector—have become increasingly important as traditional financing to the public sector has ebbed. Yet a survey of the literature reveals few recent analytical insights about alternative financing, which includes foreign direct investment, project lending, portfolio investment, closed-end equity funds, private nonguaranteed debt, licensing, joint ventures, quasi-equity contracts, and other forms of private, nonrecourse lending to private borrowers. The literature offers little solid guidance for distinguishing between alternative and traditional financing with respect to country risk, for establishing the most appropriate and efficient incentive structures and restrictions in the host country, or for identifying the optimal financing modes for international firms investing in developing countries. This gap in the analytical literature has important implications for policy formulation. It is not always clear whether a country is developing incentives and establishing safeguards (for ensuring adherence to project performance requirements) that are most effective in attracting alternative forms of finance.
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