Transportation Infrastructure and Market and Supplier Access: How Do They Shape Foreign Direct Investment?

Although the benefits of transportation infrastructure for economic and social development are generally unquestionable, depending on the transportation mode and the economic development of countries, sometimes transportation infrastructure does not have the expected positive impacts, or it may even hinder economic development. In this paper, we focus on the impact of different types of transportation infrastructure on foreign direct investments, in a close relation to the market/supplier access as an essential determinant for FDIs and thus, a potential significant interaction term with transportation infrastructure. Based on the new economic geography models, we attempt to distinguish between international and domestic transportation infrastructure in destination countries and test their impact on bilateral FDI stocks, in a gravity type setting. We take the liner shipping bilateral connectivity index as a proxy for international infrastructure and railroads density as a proxy for the domestic one. Using a panel dataset from 2008 to 2012, we find evidence that different transportation infrastructures have different impacts depending on the countries' economic development level: international infrastructure has a strong and significant positive impact on FDIs, whereas the impact of railroads depends on destination countries' economic development.