uity, FDI and debt. The relation between the stock of a country’s infrastructure and the inflow
of external capital will be conditional on a set of country-specific characteristics. Airports, power
plants, railways, roads or telecommunication facilities are important components of national pro-
duction. Hence, the paper focuses on the provision of infrastructure and it will be found out
whether it influences international investors’ decisions to invest in particular countries.
The following section provides the motivation for the data choice and explains the relationship
to be addressed. The empirical part presents the descriptive statistics of the data in section 3.1,
while the econometric approach will be explained in part 3.2. The results of the cross-sectional
analysis and the empirical evidence of capital flows and its relation to the level of infrastructure
will be discussed in section 3.3. Section 4 concludes.
2 Choice of Variables
Capital market frictions and country specific economic conditions play an important role in influ-
encing investment decisions internationally. Specific infrastructure provision may affect market
distortions and domestic performance by reducing information collection costs, transporting costs
or capital formation costs.
A country’s telecommunication system has an important impact on information collection
and transmission. It can promote a fast exchange of information and thereby increase the ability
of investors to acquire important knowledge about recent changes in the investment environment.
Hence, investors are able to monitor investment projects more closely. Obviously, geographical
distance is relevant. The greater the distance, the less attractive a country is for investment,
due to increasing costs of acquiring information. Information costs are expected to be positively
correlated to distance. The provision of a well-established telecommunication network lowers the
costs of collecting information. Therefore, international telephone circuits are used as a variable
which captures the informational dimension in the empirical section. The collection of personal
information is another important factor in deciding whether to invest in a country, so that good
air connections are potentially important. By using the explicit variable of flight air-departures,
this effect will be measured.
Transportation costs also have an impact on investment decisions. They influence the relative
prices of capital goods, since some goods must be transported from one region to another to start
or continue the production process. A good network of transportational infrastructure can lower
the costs of moving goods between regions and thereby increases the efficiency of the production
process in the country. The better the transport system, the lower the costs. This relationship is
measured by using the total length of paved roads as a proxy for the transportation system. The