Dealing Away Risk in Foreign Infrastructure Investment

Abstract

To stimulate investment and growth and to develop their infrastructure, governments around the world are seeking capital and technological know-how from private foreign investors. But to attract the private sector to finance infrastructure projects these governments must develop the appropriate investment environment. Governments must convince investors that they will not extract invested assets, unduly alter the policy environment, or otherwise renege on negotiated deals. Investors, on the other hand, want a clear roadmap to how infrastructure sectors are to be restructured, regulated, and governed to make reliable financial projections about their investments. The author's research indicates that governments and foreign investors in emerging markets develop strategies to “deal away” risk. To fill the gaps left by low market opportunity and low country credibility, governments and investors have developed measures such as “profit safeguards” and “commitment institutions.” Using a 103-country dataset over a 10-year period, the author tests the relationships among market opportunity, country risk, specific deal mechanisms, and private foreign investment performance.