THE INFLOWS FDI IN INFRASTRUCTURE IN LOW-

AND MIDDLE-INCOME COUNTRIES.

1. Introduction
Methodical research publications have examined the major influence of FDI to the
economy. Foreign direct investment outcomes are more important for developing countries than
for developed countries because emerging countries are largely underinvested economies with
limited access to financing and sophisticated technologies. Foreign direct investment fills these
gaps while also rewarding foreign investors.
Information, roads, transports, roadways, and port facilities comprise the infrastructure.
Khadaroo and Seetanah (2010) intensively investigated transportation infrastructure and several
other FDI factors in recent research and showed the strong beneficial influence of infrastructure
in attracting FDI.
Mumtaz Hussain Shah (2014) conducted research on the importance of infrastructure for
FDI in developing nations. His analysis examines the value of existing infrastructure in the host
developing country in boosting its appeal to foreign investors. Using yearly data for 90 emerging
economies from 1980 to 2007, it is discovered that, consistent with the expectations of the
market size hypothesis, the population is projected to have a large positive influence on inbound
FDI. Solid economic management based on exchange rates and economic progress has a pretty
significant influence on FDI inflows, but excessive inflation implies economic upheaval, which
discourages foreign investors.
X. Wang (2019) published a study on ASEAN FDI and Infrastructure Improvement.
Using panel data on ASEAN nations' infrastructure and FDI from 2003 to 2017, this research
intends to experimentally examine the impact of FDI on infrastructure and compare the
infrastructure effect of FDI from China and FDI from countries other than China. The results
reveal that ASEAN countries' FDI does enhance infrastructure, with a 0.308 percent
improvement in ASEAN countries' infrastructure for every one percent rise in FDI. Furthermore,
FDI from China to ASEAN nations improved infrastructure; for every 1% increase in FDI from
China to ASEAN countries, ASEAN infrastructure improved by 0.252 percent. As a result, as an
impediment to ASEAN's economic development, infrastructure may be upgraded by attracting
FDI, particularly FDI from China.
2. Literature review
The literature on FDI
The initial theory of foreign direct investment may be seen as a derivation of old theories
of global commerce, with its origins in economics. Heckscher-Ohlin (1933) maintained that due
to the diversity of resource endowments across the countries, it is one of the cornerstones for
establishing international capital flows for international commerce. The concept basically states
that nations would export goods that use their abundant and inexpensive element of production
and import products that use their shortage factor. Nevertheless, in an imperfect market
environment, Hymer (1960) argued that corporations engaging in foreign direct investment could
achieve monopolistic benefits over host enterprises.
Foreign direct investment (FDI) is becoming increasingly essential in the current economy.
According to Rugman (1988), multinational firms account for half of all commerce and one-fifth
of global GDP.

Infrastructure and FDI

Poor infrastructure raises transaction costs and limits access to domestic and international
markets, limiting foreign direct investment in developing countries. To achieve better efficiency
in extending infrastructure facilities, consider commercial principles and shifting liability for
infrastructure providing through management contracts or leases such as build-operate-transfer
(BOT), builddown operates (BOO), and outright privatization. Indeed, privatization has shown to
be a successful strategy for attracting foreign direct investment (FDI) (Mlambo, 2006).
Infrastructure can have a variety of effects on both developing and established countries. FDI
inflows into developing economies are drawn to infrastructure (Khadaroo and Seetanah, 2010;
Asiedu, 2006).
Privatization has proven to be an effective approach to attracting foreign direct
investment (FDI) (Mlambo, 2006). Infrastructure has diverse effects on both developing and
industrialized countries. Infrastructure is very appealing to FDI inflows into emerging economies
(Khadaroo and Seetanah, 2010; Asiedu, 2006). According to Sekkat and Varoudakis (2007),
infrastructure is more appealing to FDI than openness and investment climate in growing
economies. Addison et al. (2006) acknowledged such a promotional benefit only for developed
nations; nevertheless, such a scenario does not exist for developing countries. According to Bae
(2008), infrastructure is not a motivator but an indication of FDI Inflow in major expanding
industries in industrialized nations.
Asiedu et al. (2006), Erdal et al. (2008), and Khadaroo et al. (2010) all argue that infrastructure
has a positive relationship with FDI inflows. Infrastructure includes street organizations, railway
organizations, telecommunication organizations, and all apparatuses, machines, and materials.
(Musila et al., 2006). Concentrates by Musila et al. (2006) shows that FDI into Africa is
dependent on any developing infrastructure, which pulls in unfamiliar financial advocates.
Expansion of web clients increases the degree of FDI (Mateev et al., 2013). Kahouli et al. (2015)
indicated that financial advocates pick a country with more prominent web accessibility. Their
results confirm the discoveries of Choi (2003), who likewise observed that the number of web
clients increased and promoted internal FDI.
According to Sekkat and Varoudakis (2007), infrastructure in emerging countries is more
appealing to FDI than openness and investment climate. Addison recognizes the promotional
value of his work.

GDP per capita and FDI

Bengoa and Sanchez – Robles (2003) find a positive correlation between FDI and
economic growth but host countries require human capital, economic stability and liberalized
markets to benefit. long-term from FDI inflows.
The experimental results obtained from heterogeneous panel analysis show the following.
For EU countries, the results support the GDP-FDI (growth-boosting FDI) causality hypothesis.
Regarding ASEAN, there is a two-way relationship between GDP per capita and FDI as in the
case of Indonesia and Thailand. In the case of Singapore and the Philippines, however, FDI is
driven by the host country. GDP growth. So the resullts depend on the specific path and country
(Argiro Moudatsou and Dimitrios Kyrkilis 2011).
Joseph Hakizimana (2015) and Alshamsi (2015) also showed that there is a positive
relationship between FDI inflows and GDP per capita. As the level of development increases, the
population's ability to purchase goods and services will increase, which will spur foreign
investors to invest.
 Control variables:
Gross Domestic Product (GDP): GDP is most commonly used as the main determinants
of FDI flows between countries. This is because FDI is strongly influenced by the market size of
the partner countries as FDI inflows tend to be concentrated in larger economies (Kinoshita and
Campos (2003).
This study investigates the determinants of FDI inflows in six Central and Eastern
European (CEEC) countries by combining traditional factors and institutional variables for the
period 1996-2009. The results verify the positive and significant economic role of GDP size.
Mohsen Mehrara (2012) indicates that it have strong evidence of bidirectional causality between
economic growth and FDI inflows. The countries can increase FDI inflows by stimulating their
economic growth.
Government Expenditure: Some studies suggest that the same government policy can
enhance or diminish market imperfections, therefore rising or falling FDI inflows. Although,
inward FDI flows are influenced positively by investment opportunities and negatively by
effectiveness requirements laid down by government agencies. Contractor (1991) concluded
"Changes in FDI policy proved to have a minor and fragmented impact on investment flows".
Benefits and performance goals of government, according to the studies of Guisinger (1985) and
Grubert and Mutti (1991), successfully modified foreign investment decisions.
Inflation: Inward FDI flows are influenced negatively by inflation (Agyenim Boateng
2015). Inflation tends to reduce FDI in advanced industrial economies while in developing
economies its effect on FDI is negative (Agudze and Ibhagui 2021).
Value-added share of agriculture in GDP: We also include the value-added share of
agriculture in GDP as an explanatory variable because FDI is an important source of investment
in agriculture and and can enhance agricultural productivity by introducing new technology
(Tondl and Fornero 2010).

3. Methodology and Data

3.1. Econometric model
(1) LnFDIit = α + β1.INFit + β2. LnGDP_PCit + β3.INFit*LnGDP_PCit + γ.Zit + εit
 FDI is the dependent variable. Previous empirical studies used different modes of FDI
and consistent with other studies, we use FDI inflows, which is net FDI inflows in current US
dollars. Where INFit represent to infrastructure and we use mobile phone subscriptions per 100
people as a proxy of infrastructure in line with other studies. GDP_PC it represent to GDP per
capita. Zit are control variables such as government expenditure, inflation, value-added share of
agriculture in GDP and εit is the error term.
To examine the impact of infrastructuremkp6 on in FDI inflows, this paper use panel data
of 53 low and middle-income countries for 2000 to 2021. The main soures of data are the World
Bank Open Data.

3.2. Estination method

To investigate the impact of institutions on FDI, we estimate the following regression:
(1) FDIit = α + β1.INFit + β2. LnGDP_PCit + β3.INFit*LnGDP_PCit + γ.Zit + εit
Where α, β and γ are the parameters we estimate. We cannot estimate this fixed-effects
regression using the least squares method (LS) if the linear regression assumptions are not
satisfied. Using the LSDV method will lead to biased and inconsistent estimates. Therefore, we
solve this problem by using the system Panel Generalized Method of Moments (GMM) or the
instrumental variable method.
The GMM system is a combination of level and difference dynamic equations to correct
on GMM-differences because it both complements the equation at the first differences with the
level equation and allows error correction in the the other regressors.

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