Question

3) According to the Asian Development Bank Institute paper by K.C. Fung, Alicia Garcia-Herrero and Francis Ng, discuss in details the theoretical approaches associated with foreign direct investment (FDI) in cross-border infrastructure projects. What are the economic or financial determinants of FDI in transnational infrastructures? Pick one case study of transnational infrastructure project from either Southeast Asia, Latin America or Eastern Europe and discuss in details.

Answer 1

the theoretical approaches associated with foerign direct investment in cross border infrastructure projects are -

There are three inter related approaches present in the literature related to FDI in cross border infrastructure projects. These are - theory of public good, game theory and incomplete contract theory.

The first approaches proposes that given the potential free rider problems, positive spillover, over time and space, there will be under investment in cross border infrastrural projects if this investment is left to the market. In order to have effiecient contribution from FDI for infrastrucual projects or for public goods it is required to have significant contribution from national government and inetrnational organizations as well.

Second approach suggests the situation of FDI across cross borders in game theory scenario. It proposes that when two governments in transactional projects invest and if either of parties beleive that investmnet by another will not be materialize then both the governments will choose not to invest which will become risk dominant strategy. This will also occur in dynamic games. Only coordination by regonal initiavtive could solve the problem.

From third approach it is provided that energy infrastructure investment which facilitates long term exchanges of energy will have to be supported by long term contracting. But suchcontracting are incomplete partly because of unforseen domestic energy imbalances.

inThe economic or finanacila determinants are related to macroeceonmic conditions of the countries involved in FDI investment such as current and future inflation rates, expected gross domestic product growth rates, degree of foerign indebtness and exchange rate risk.