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Getting help from abroad: The macroeconomics of foreign direct investment in infrastructure in low-income countries

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  • Yin Germaschewski
Abstract
Infrastructure financing needs in most low-income countries are substantial, but funding for such needs is only partly covered by national governments and aid donors. This paper introduces foreign direct investment (FDI) through publicprivate partnerships as a source of infrastructure financing in low-income countries. A two-sector open economy model is developed to assess the macroeconomic performance of FDI in infrastructure. With efficient foreign investment, an increase in revenue-generating infrastructure investment boosts productivity and spurs private investment while stabilizing domestic prices. A direct comparison between infrastructure financed by domestic versus foreign investment shows that foreign investment creates higher output growth and welfare gains and is preferable to domestically sourced investment, irrespective of the underlying financing instrument the domestic economy is employing. FDI in non-revenue-generating infrastructure is also analyzed and discussed.

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  • Yin Germaschewski, 2016. "Getting help from abroad: The macroeconomics of foreign direct investment in infrastructure in low-income countries," Canadian Journal of Economics, Canadian Economics Association, vol. 49(4), pages 1502-1535, November.
    • Handle: RePEc:cje:issued:v:49:y:2016:i:4:p:1502-1535
    DOI: 10.1111/caje.12242
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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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