The distance between the reporting country and the counterparty country is significant in a basic gravity model for portfolio investment assets, FDI assets and gross exports when we cover all the reporting countries or when we select Korea, China, and the United States as a reporting country in our samples. When we select Japan as a reporting country, the distance is still significant for FDI assets and gross exports but not for portfolio investment assets. This shows the uniqueness of Japan's portfolio investments across countries: 1) it deviates from the world's "average" and 2) it cannot be explained by a basic gravity model that explains Japan's FDI asset allocation and exports. Based on these observations, this paper investigates factors including institutional qualities, risks of issuers, and sizes of bond and equity markets in counterparty countries that can explain and highlight the uniqueness of Japan's portfolio investment asset allocation across countries. Lastly, we estimate if Japan's portfolio investments have achieved above-average returns.

We study the relationship between foreign debt and GDP growth using a panel dataset of 122 countries from 1980 to 2015. We find that economic growth correlates positively with foreign debt and that the relationship is causal in nature by using the sovereign credit default swap spread as an instrumental variable. Moreover, using a local projection analysis we find that an increase in foreign debt leads to an increase in investment and then GDP growth in subsequent years. This indicates that foreign debt contributes to GDP growth through capital accumulation. On average, the sovereign default risk is lower and foreign debt is higher in OECD than non-OECD countries. This suggests that sovereign default risks are responsible for upstream capital flows - capital flows from poor to rich countries - that contribute to GDP growth in OECD countries. In our model foreign debt accounts at least partially for growth in OECD countries not explained by standard controls used in the growth regression literature. Foreign debt increases GDP growth by 0.4 percentage points on average accounting for 27 percent of economic growth from 1997 to 2015 in the US while it has no impact on GDP growth in China.