Infrastructure Availability, Foreign Direct Investment Inflows and Their Export-orientation: A Cross-Country Exploration

This paper analyzes the role of infrastructure availability in determining the attractiveness of countries for FDI inflows and for export-orientation of MNE production. We posit that investments by governments in providing efficient physical infrastructural facilities improve the investment climate for FDI. MNEs may be particularly sensitive to infrastructure availability for locating their investments designed to feed the global, regional or home country markets. First, a single composite index of infrastructure availability is constructed capturing availability of transport infrastructure, telecommunications infrastructure, information infrastructure, energy availability for 66 countries over 1982-94 period using the principal component analysis. The role of infrastructure index in explaining the attractiveness for foreign production by MNEs is evaluated in the framework of an extended model of foreign production. The estimations corroborate that infrastructure availability does contribute to the relative attractiveness of a country towards FDI by MNEs, holding other factors constant. Furthermore, the export-orientation of production of MNE affiliates, especially when the production is meant for third country markets, is significantly related to infrastructure availability. Therefore, MNEs’ decision making pertaining to location of product mandates for global or regional markets sourcing is significantly influenced from infrastructure availability considerations. These findings suggest that infrastructure development should become an integral part of the strategy to attract FDI inflows in general, and export-oriented production from MNEs in particular.