assumption is that there should exist a positive correlation between the length of roads in the
country and the propensity to invest in such a country. The costs of sending goods to retailers
and distributors at home and abroad are decreasing with a rising level of transport facilities.
It is interesting to consider countries which are landlocked, i.e. they have no direct access to
coastal areas, hence, they might possibly have higher costs of final production.3 Landlocked
countries can therefore be expected to receive less inflows of new investment. Nevertheless, the
provision of an alternative network in terms of air-transport could attract more investment into
these regions. The above mentioned variable on air-departures might also be able to capture
those effects.
Another aspect worthwhile investigating is the question whether the geographical position of
the country has any impact on capital flows. In general one can argue that countries with an in-
creasing distance to the equator are equipped with a better infrastructure and are stronger in the
process of production and economic growth. Looking at Africa, most countries at the equator do
not have a solid infrastructure basis yet and lack a good economic performance. Countries closer
to the equator are expected to receive smaller amounts of capital inflows, especially portfolio
flows. To assess this latitude is utilised.
Countries which tend to be more diversified in production are less affected by the strong
fluctuations of commodity prices. Hence, they may represent better credit risks. To consider the
product differentiation in exports the ratio of mineral exports relative to merchandise exports is
used to test for such effects.
In order to account for macroeconomic heterogeneity of countries additional control variables
are introduced. The country size (here the total GDP ) plays an important role. On the one hand
large countries are more attractive due to the existence of fixed costs in acquiring information
about the investment conditions in the country. They may also be less vulnerable to external
shocks, due to diversified production. On the other hand, a small open country can be more
attractive since its economy may be able to adjust to changes in the international economic
environment more quickly and flexibly. This makes such countries more competitive and safe
to invest in. The wealth of the country, GDP per capita, has implications for the countries’
positions as a net creditor or debtor. Wealthier countries tend to have more asset positions than
liabilities.4 The openness of a country should not be neglected as more open countries represent
better credit risks. They are more vulnerable to external sanctions and gain less from defaulting.
Openness is measured by using the sum of predicted bilateral trade shares from the geographical
3Especially developing countries need to import most equipment-investment from abroad to start the produc-
tion.
4This argument has been confirmed by Lane and Milesi-Ferretti (2001a).