External debt and direct investment – what is the difference?

Which investments are more attractive for the state?

To answer this question, it is important to understand exactly how foreign borrowing differs from direct investment and what consequences they have for the country's economy.

External debt is when the state comes up with a project and applies for money abroad, taking it at a certain percentage with an obligation to return it in the future. In fact, this is a form of credit: the country receives funds, implements a planned project, and then pays back the debt along with interest. Such funds are most often used to build infrastructure, support the budget, finance social programs, or develop strategic industries. However, external debt has its weaknesses. It increases the debt burden of the state, makes the economy dependent on external creditors and may limit financial independence in the future. If the project does not pay off or the global situation changes, the debt will still have to be repaid, sometimes at the expense of taxpayers or cost reductions.

Direct investment is a different path. Here, the initiator of the project can be the state together with a foreign investor, who does not lend money, as in the first case, but invests it in the project itself, sharing all risks and future results with the state. Such an investor is not only interested in getting his funds back, but to receive profit, That's why he actively participates in project management, implements technologies, trains staff, and sets up production. Direct investments often bring the country not only money, but also new jobs, technology, and access to international markets.

Of course, in most cases, direct investments are more attractive to the state. They do not create a debt burden, but when successfully implemented, they bring long-term benefits to the economy.

And what is the interest of a direct investor, as opposed to someone who just lends money? A direct investor seeks to participate in the separation profit, which can be significantly higher than the interest on the loan. His interest lies in real participation in the business - in receiving a share of the project's income, and not just fixed payments. In addition, cheap resources in the country where the project is being implemented, such as oil, gas, timber, and labor, become an attractive factor for investors. All this makes investments profitable, especially if the project is export-oriented or has long-term potential.

Thus, external debts and direct investments are two completely different mechanisms for raising funds. The first is a debt obligation, the second is a partnership. And if debt brings in short-term funds with future payments, then direct investment opens the way to development, technology, and sustainable economic growth.