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Rethinking foreign infrastructure investment in developing countries

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  • Ramamurti, Ravi
  • Doh, Jonathan P.

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.

Suggested Citation

  • Ramamurti, Ravi & Doh, Jonathan P., 2004. "Rethinking foreign infrastructure investment in developing countries," Journal of World Business, Elsevier, vol. 39(2), pages 151-167, May.
  • Handle: RePEc:eee:worbus:v:39:y:2004:i:2:p:151-167
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    References listed on IDEAS

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    1. 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.
    2. Ravi Ramamurti, 2001. "The Obsolescing ‘Bargaining Model’? MNC-Host Developing Country Relations Revisited," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 32(1), pages 23-39, March.
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    Cited by:

    1. 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.
    2. repec:eee:jbrese:v:88:y:2018:i:c:p:123-131 is not listed on IDEAS
    3. Elie NGONGAN, 2014. "Physical Infrastructures and Attractiveness of Private Capital in Sub-Saharan African (SSA) Countries," Journal of Economics Library, KSP Journals, vol. 1(1), pages 9-21, December.
    4. 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.
    5. Fernández-Méndez, Laura & García-Canal, Esteban & Guillén, Mauro F., 2015. "Legal Family and Infrastructure Voids as Drivers of Regulated Physical Infrastructure Firms' Exposure to Governmental Discretion," Journal of International Management, Elsevier, vol. 21(2), pages 135-149.
    6. 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.
    7. 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.
    8. 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.
    9. 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).
    10. repec:spr:manint:v:57:y:2017:i:5:d:10.1007_s11575-017-0312-4 is not listed on IDEAS
    11. Carney, Michael & Dieleman, Marleen & Taussig, Markus, 2016. "How are institutional capabilities transferred across borders?," Journal of World Business, Elsevier, vol. 51(6), pages 882-894.
    12. 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.
    13. Manger, Mark, 2008. "International Investment Agreements and Services Markets: Locking in Market Failure?," World Development, Elsevier, vol. 36(11), pages 2456-2469, November.
    14. Jiang, Yi & Peng, Mike W. & Yang, Xiaohua & Mutlu, Canan C., 2015. "Privatization, governance, and survival: MNE investments in private participation projects in emerging economies," Journal of World Business, Elsevier, vol. 50(2), pages 294-301.
    15. Ngongan, Elie, 2014. "Physical Infrastructures and Attractiveness of Private Capital in Sub-Saharan African (SSA) Countries," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 7-21.
    16. 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.
    17. 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.
    18. Jakob Müllner, 2017. "International project finance: review and implications for international finance and international business," Management Review Quarterly, Springer;Vienna University of Economics and Business, vol. 67(2), pages 97-133, April.
    19. Vivoda Vlado, 2011. "Bargaining Model for the International Oil Industry," Business and Politics, De Gruyter, vol. 13(4), pages 1-36, December.
    20. Curwen, Peter & Whalley, Jason, 2013. "Mapping worldwide mobile networks: Some problems and indicative solutions," Telecommunications Policy, Elsevier, vol. 37(11), pages 1150-1165.

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