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Rethinking foreign infrastructure investment in developing countries

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  • Ramamurti, Ravi
  • Doh, Jonathan P.
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    Abstract

    The 1990s witnessed a boom in foreign direct investment (FDI) in infrastructure sectors in developing countries, which was surprising for at least two reasons. First, infrastructure sectors, unlike manufacturing, suffer from the "market failure" problem, and the solution to that problem--government regulation--brings with it the "obsolescing bargain" risk. Second, such investments are even riskier when made in developing countries, which are characterized by weak institutions and political instability. Why, then, did the boom occur, and will it continue? Three industry-specific drivers and two country-specific drivers are considered for the boom. Foreign investors may have believed: (1) that infrastructure sectors were losing their "natural monopoly" characteristics; (2) that first-movers would profit handsomely from the emerging globalization of these sectors; (3) that novel techniques like project financing would reduce their risks sharply; (4) that the climate for FDI in developing countries had changed fundamentally in the 1990s; and (5) that host developing countries would not expropriate foreign-owned infrastructure assets as they had in the past. Based on actual experience in the 1990s, we evaluate the strengths and limitations of each of these drivers. Our overall assessment is that infrastructure FDI in developing countries will stabilize in the future at a lower, more sustainable level. We conclude with policy implications for multinational corporations (MNCs) and governments.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of World Business.

    Volume (Year): 39 (2004)
    Issue (Month): 2 (May)
    Pages: 151-167

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    Handle: RePEc:eee:worbus:v:39:y:2004:i:2:p:151-167

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    References

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    1. Megginson, William L & Nash, Robert C & van Randenborgh, Matthias, 1994. " The Financial and Operating Performance of Newly Privatized Firms: An International Empirical Analysis," Journal of Finance, American Finance Association, vol. 49(2), pages 403-52, June.
    2. Ramamurti, Ravi, 2000. "Risks and rewards in the globalization of telecommunications in emerging economies," Journal of World Business, Elsevier, vol. 35(2), pages 149-170, July.
    3. Michael S Minor, 1994. "The Demise of Expropriation as an Instrument of LDC Policy 1980-1992," Journal of International Business Studies, Palgrave Macmillan, vol. 25(1), pages 177-188, March.
    4. Ravi Ramamurti, 2001. "The Obsolescing ‘Bargaining Model’? MNC-Host Developing Country Relations Revisited," Journal of International Business Studies, Palgrave Macmillan, vol. 32(1), pages 23-39, March.
    5. Richard A. Brealey & Ian A. Cooper & Michel A. Habib, 1996. "Using Project Finance To Fund Infrastructure Investments," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 25-39.
    6. World Bank, 2000. "India : Country Framework Report for Private Participation in Infrastructure," World Bank Other Operational Studies 15275, The World Bank.
    7. Ramamurti, Ravi, 1997. "Testing the limits of privatization: Argentine railroads," World Development, Elsevier, vol. 25(12), pages 1973-1993, December.
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    Cited by:
    1. Ledyaeva, Svetlana & Karhunen, Päivi & Kosonen, Riitta, 2013. "Birds of a feather: Evidence on commonality of corruption and democracy in the origin and location of foreign investment in Russian regions," European Journal of Political Economy, Elsevier, vol. 32(C), pages 1-25.
    2. Johnson, Julius H. & Arya, Bindu & Mirchandani, Dinesh A., 2013. "Global integration strategies of small and medium multinationals: Evidence from Taiwan," Journal of World Business, Elsevier, vol. 48(1), pages 47-57.
    3. Tidiane Kinda, 2008. "Infrastructures et flux de capitaux privés vers les pays en développement," Revue économique, Presses de Sciences-Po, vol. 59(3), pages 537-549.
    4. Kinda, Tidiane, 2007. "Increasing private capital flows to developing countries: The role of physical and financial infrastructure," MPRA Paper 19163, University Library of Munich, Germany.
    5. Manger, Mark, 2008. "International Investment Agreements and Services Markets: Locking in Market Failure?," World Development, Elsevier, vol. 36(11), pages 2456-2469, November.
    6. Tidiane KINDA, 2010. "Increasing Private Capital Flows To Developing Countries: The Role Of Physical And Financial Infrastructure In 58 Countries, 1970-2003," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 10(2).
    7. Haar, Laura N. & Marinescu, Nicolae, 2011. "Energy policy and European utilities' strategy: Lessons from the liberalisation and privatisation of the energy sector in Romania," Energy Policy, Elsevier, vol. 39(5), pages 2245-2255, May.
    8. Oetzel, Jennifer, 2005. "Smaller may be beautiful but is it more risky? Assessing and managing political and economic risk in Costa Rica," International Business Review, Elsevier, vol. 14(6), pages 765-790, December.
    9. Yamin, Mo & Sinkovics, Rudolf R., 2009. "Infrastructure or foreign direct investment?: An examination of the implications of MNE strategy for economic development," Journal of World Business, Elsevier, vol. 44(2), pages 144-157, April.
    10. Khoury, Theodore A. & Peng, Mike W., 2011. "Does institutional reform of intellectual property rights lead to more inbound FDI? Evidence from Latin America and the Caribbean," Journal of World Business, Elsevier, vol. 46(3), pages 337-345, July.

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