Foreign direct investment in infrastructure in developing.pdf

Foreign direct investment in infrastructure in developing countries: does regulation make a difference? Colin Kirkpatrick, David Parker and Yin-Fang Zhang* Since the mid-1980s, governments around the world have pursued policies to encourage private sector participation in the financing and delivery of infrastructure services. The natural monopoly characteristics of infrastructure utilities mean, however, that the privatization of these industries risks the creation of private-sector monopolies. Therefore, governments need to develop strong regulatory capabilities to police the revenues and costs of the privatized utility firms, while, at the same time, establishing regulatory credibility among investors. This article provides an empirical examination of the relationship between the quality of the regulatory framework and foreign direct investment (FDI) in infrastructure in middle and lower income developing countries during the period 1990 to 2002. The results confirm that FDI in infrastructure responded positively to an effective domestic regulatory framework. By implication, where regulatory institutions are weak and vulnerable to “capture” by the government (or the private sector), foreign investors may be more reluctant to make a major commitment to large scale infrastructure projects in developing countries. Key words : infrastructure; foreign direct investment; regulation; developing countries. * Colin Kirkpatrick is Hallsworth Professor of Development Economics and Co-Director of the Centre on Regulation and Competition at the University of Manchester, United Kingdom. David Parker is Professor of Business Economics and Strategy at Cranfiel