Cross-Country Evidence on the Link between the Level of Infrastructure and Capital Inflows



4 Conclusion

The aim of this paper is to explore the link between the level of developing countries’ infras-
tructure and their gross foreign liabilities positions. The evidence is presented in a cross-section
of countries and suggests a positive relationship between the level of infrastructure and capi-
tal
flows. It has been illustrated that there exists a positive correlation between international
telephone circuits and countries’ stock of debt. A positive impact of air-departures on the av-
erage stock and
flow position of FDI is established. Additionally, there are joint effects of the
infrastructure variables by analysing the FDI positions of countries.

Controlling for other determinants, countries with a diversified export structure or access
to coastal areas are able to attract more FDI. Country size matters in explaining the total
liability position of countries. Smaller countries hold more liabilities. Trade openness also plays
an important role in explaining the stock of liabilities in the cross-section. Trading countries
hold higher stocks of total liabilities and debt. However, trade openness is inversely related
to the stock and
flow of FDI. As one would expect, poorer countries have a higher stock of
debt liabilities. Considering the geographical position of countries, an increasing distance to the
equator implies lower stocks of debt and total liabilities, while it is linked to a higher stock of
FDI.

Given the results established above, the level of infrastructure in countries, especially in
information and transport technology, is able to explain cross country variations in FDI and debt
positions of countries. Thus, it can serve as a further determinant in explaining capital
flows
between countries. If countries wish to increase international capital in
flows, they should improve
their information and transport infrastructure. The evidence established above also suggests
new directions for theoretical work in modelling international capital
flows by incorporating an
infrastructure component into formal analyses. In future work it might be interesting to include
data on new information technology, e.g. internet access, and to establish their partial correlation
with international capital
flows.

12



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