The economics of large-scale infrastructure FDI: The case of project finance
AbstractIn this paper a theoretical framework is developed to explain why multinational enterprises invest in infrastructure through the mode of project finance (PF) instead of using corporate finance. Infrastructure assets are susceptible to creeping expropriation from host governments, and to hold-up from concentrated suppliers/buyers. Corporate finance-based foreign direct investment (FDI) cannot fully mitigate these threats. However, PF-based FDI through strategic use of capital structure – chiefly high leverage and syndicate structure of debt – improves the bargaining position of firms in ex post recontracting negotiations. High leverage precommits cash flows, serves as a monitoring and early warning mechanism that reveals creeping expropriation, induces lenders to join renegotiations and reduces reported net profits. The syndicate structure of debt creates a reputation effect for host countries. High debt shields wealth from concentrated suppliers/buyers while separate incorporation in PF allows suppliers/buyers to hold equity stakes. This theoretical framework is tested by assembling a database of 200 investments worth $159.97 billion, by 167 firms, in 128 countries over 17 years. Sample selection bias is controlled for through Heckman probit specification. The hypothesis that PF-based FDI helps mitigate hold-up from concentrated suppliers/buyers finds strong support, while the hypothesis that PF mitigates country risk finds limited support.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Palgrave Macmillan in its journal Journal of International Business Studies.
Volume (Year): 41 (2010)
Issue (Month): 6 (August)
Contact details of provider:
Web page: http://www.palgrave-journals.com/
Postal: Palgrave Macmillan Journals, Subscription Department, Houndmills, Basingstoke, Hampshire RG21 6XS, UK
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Arezki, Rabah & Deininger, Klaus & Selod, Harris, 2011.
"What drives the global"land rush"?,"
Policy Research Working Paper Series
5864, The World Bank.
- Rabah Arezki & Klaus Deininger & Harris Selod, 2012. "What Drives the Global Land Rush?," OxCarre Working Papers 072, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
- Rabah Arezki & Klaus Deininger & Harris Selod, 2011. "What Drives the Global Land Rush?," CESifo Working Paper Series 3666, CESifo Group Munich.
- Rabah Arezki & Klaus Deininger & Harris Selod, 2013. "What Drives the Global "Land Rush"?," Economics Series Working Papers OxCarre Research Paper 12, University of Oxford, Department of Economics.
- Harris Selod & Klaus W. Deininger & Rabah Arezki, 2011. "What drives the global land rush?," IMF Working Papers 11/251, International Monetary Fund.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Elizabeth Gale).
If references are entirely missing, you can add them using this form.