Financing Risk in Infrastructure FDI : A Property Rights Perspective

Abstract Property rights theory (PRT) focuses on how allocation of residual control rights of ownership resolves incentive problems from incomplete contracts. However, when asset ownership is efficient for a transacting party, PRT ignores financial resource constraints preventing the party from purchasing it. We include creditors, who provide financial resources but are exposed to agency conflicts with equity‐owners, in property rights analysis. Multinational enterprises (MNEs) reduce agency conflict with creditors through contractual covenants and collateral. Yet contracts are incomplete. Under incomplete contracts, how do MNEs mitigate financing risk, the risk that supply of capital from creditors is delayed or entirely unavailable? We distinguish between incomplete contracts arising from weak property rights institutions and weak contracting institutions. We theorize that allocation of specified control rights through operating and maintenance (O&M) contracts to MNE‐owners mitigates financing risk in countries with weak property rights institutions because MNE‐owners possess high‐powered incentives to exert requisite effort to adapt operations to unexpected contingencies. In contrast, such allocation of O&M contracts to MNE‐owners increases financing risk in countries with weak contracting institutions because such allocation increases agency conflict between MNE‐owners and creditors. Empirical analyses of 363 project‐financed investments in 52 countries worth US$1.53 trillion over 1990–2018 support our theory.