This paper attempts to answer the question of whether the external debt stock and associated servicing always discourage domestic investments in the Less Developed Countries (LDCs) as claimed by some authors. Use was made of a comparative modeling approach involving multiple log-linear regression, distributed lag, and autoregressive models. Comparative estimation methods were also employed, including the OLS, Cochrane-Orcutt, Maximum Likelihood, instrumental variable techniques against time-series annual Nigerian data from 1970 through 2001. The results, among others, indicate that both external debt stock and debt service are not always disincentives to domestic investments. The debt service (debt burden) variable particularly holds some positive effects for Nigeria’s domestic investments especially when such payments attract further capital inflows and the externally-borrowed funds are put to best economic usage. In this light, developing countries may have to change their orientation, which is biased towards debt forgiveness, and see some good in debt-servicing as a proper management strategy.

External indebtedness has become a natural economic phenomenon among the Less Developed Countries (LDCs) of the globe. It has been observed as an awaiting disaster as well as a real burden plaguing these countries. Huge accumulations of debt over the years are believed to have provided no breathing space to the debtor-countries to exercise themselves in carefully-planned economic activities. Poverty is said to be seriously associated with large debt stock. Thus, LDCs, with heavy loads of debt are currently branded Heavily Indebted Poor Countries (HIPC). They are the ever-sick patients of the IMF(International Monetary Fund) 1996 initiatives. The overhang theory is also accompanied by psychological, social, moral, and political hazards and unsolicited intervention and assertion, associated with debtor-creditor relationship. The debtor is the pronounced slave of the creditor, and so is the nature of the relationship between the LDCs and their creditors.

Moving hand-in-glove with the debt overhang phenomenon is the debt burden argument. External debt burden is usually seen in the light of the debt service payments that are made by debtor-countries to their creditors. These payments relate to the liquidation of principal and interest associated with the debt contract. When debt service becomes significantly large, a number of effects are usually anticipated. For one thing, debt