Cross-country Variations in Infrastructure Development, Inflow of FDI and Quality of Institutions

This study tries to investigate the cross-country variations in infrastructure development among different sets of countries with varying institutional rankings, over time, by building five infrastructure indices. Along with building the total/composite infrastructure index, four other (energy, ICT, finance and transport) sub-indices are also built in this study. The strength of our study lies in the fact that we not only find variations in the total infrastructure development but also within the sub-indices. We have introduced the role of country-specific Institutional quality and inflow of FDI empirically in this regard to determine the cross-country variance in infrastructure development. The core hypothesis of our study is that countries that receive a good amount of FDI inflows will have impressive infrastructure development provided the country-specific institutional quality is high. On the contrary, countries with low institutional indexes may not have a positive association between FDI inflows and infrastructure development. However, there are exceptions. For example, institutionally strong countries like Ireland and Belgium should invest more funds to boost their financial infrastructure sector. On the other hand, another institutionally strong country like Norway should develop its transport infrastructure. In this study, we are mainly interested in the joint impact of FDI inflows with the institutional variable on infrastructure development that has been largely neglected in the empirical literature. Using two-dimensional panel data for FDI inflows for 39 countries over the period 2000–20, we find that the conditional effects are positive and significant. From the policy point of view, we identify the possible areas of the infrastructure of a country that needs capital to be invested and at the same time identify some of the countries that need to improve their institutional quality that will eventually lead to improvement in the infrastructure development. The results of our study are robust to different institutional measures and infrastructure indices.