This paper examines the relationship between the quality of the regulatory framework and foreign direct investment in infrastructure in developing countries. Using data for the period 1990 to 2002, we test the impact of regulation on the inflow of foreign direct investment (FDI) to infrastructure projects in middle and lower income economies. There are seven sections to the paper. The next section reviews the recent growth in private participation in infrastructure in developing countries and describes the sectoral and geographical distribution of private investment in the infrastructure sector. Section 3 reviews the recent literature on institutional development and economic performance, focusing on the empirical evidence on the effect of institutional governance on the location of foreign direct investment. Section 4 considers the role of infrastructure regulation in developing countries, identifies the characteristics of 'good' regulation, and discusses the difficulties that are encountered in establishing a regulatory regime that is credible to private market actors, in particular to potential investors in infrastructure projects. In section 5 we address the central question that this paper is concerned with, namely has the quality of regulation influenced the inflow of foreign direct investment to the infrastructure sector in developing countries? The dependent and independent variables selected for inclusion in the empirical testing are described, and the data sources are detailed. The econometric model used for testing the relationship between regulation and FDI is also specified in this section. Section 6 presents the estimation results. The final section provides a summary and conclusions.
Manchester, UK, CRC Working Paper, No. 85, 26 pp.