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4.1.5 Scientific Research

A main insight after the liberalization of capital markets was that investments did not behave as expected. While theory suggested that investments will focus on the poorest regions – which ought to exhibit the highest profit rates (MPK, cf. chapter 2.1.4) – they rather preferred the already developed countries (with a lower MPK), followed on a significant lower level by “middle-income-countries”.

The Governance Matters Approach in Economics

Soon, macroeconomic and institutional frictions such as inflation or insufficient property rights in the least developed countries were identified as main causes for this contra-intuitive behavior of capital flows on the global level. Further on, several additional variables were introduced and the general concept of “business environment” got prominent. Overall, the macroeconomic climate, political stability, institutions, governance and human capital were found to stimulate – or to suppress – domestic economic and FDI-activities, hence, growth. Typically the names Barro, Mauro and in particular Kaufmann’s governance project (cf. Kaufmann et. al. 2007 a; 2007 b) are to be mentioned in this regard.

Garibaldi et. al. (2002) focused on transition economies and found the uneven distribution of FDI among 25 transition economies to be dependent on “economic fundamentals” (ibid: 30) such as “macroeconomic stability, the level of economic reforms, trade liberalization, natural resource endowment, the privatization method, direct barriers to inward direct investment, and a measure of government »red tape« that reflects obstacles to investment and entrepreneurship and is closely related to corruption” (ibid.). Initially four more governance indicators had entered the regression but were removed due to individual and jointly insignificance (ibid: 24). Quantitative studies dealing with governance issues on the local level in Romania (NUTS II or NUTS III) are missing (yet) to my knowledge.

Infrastructure and it’s Role in an Economy

Several other cross-country studies found a significant positive impact of infrastructure on FDI (e.g. Wheeler & Mody 1992, World Bank 1994, Kumar 2001, Mollik et. al 2006). Kumar (2001) showed that infrastructure is an important driver of growth and plays a major role in attracting export-oriented FDI. He even advises developing countries “to focus on the development of physical infrastructure” (ibid: 16) rather than other kinds of incentive competitions with developed countries in order to attract FDI. Demekas et.al. (2007) demonstrated this pattern as persistent across the CEECs. Bellak et. al (2007) even found in their CEEC-sample that a better endowment with infrastructure compensates for higher (corporate) tax levels. Infrastructure is typically captured by road and railway densities, motor- and waterways or the number of major sea- and airports (cf. ibid: 7). Often deployed are (fixed or mobile) telephone line frequencies or other communicational measures. Many studies found these to be the most significant variables (cf. chapter for critics).

The role of infrastructure on the regional level for attracting FDI was assessed e.g. by Basile (2002) for the Italian case. FDI in Italy has been continuously unevenly distributed, preferring the developed north, followed by the middle part of the country while the south was treated with several reservations. Basile found public infrastructure to be an important explanatory variable for this unequal distribution of FDI-activities. Simulations suggested disappointingly that considerable upgrades of the infrastructure stock would be necessary to yield significant attractivity effects for the South. Namely the infrastructure stock of the South had to be increased by 160 % to reach the level of Milan in the North or by 80% to reach the average level of the middle part, while a more reasonable (ie. a more feasible) increase of just 10% is expected to yield hardly any effects (cf. ibid: 27ff.). Goodspeed et. al. 2006 obtained similar results for Mexico but mainly concentrated on telephone lines as proxy for “international infrastructure” and “domestic infrastructure” for interstate and secondary roads. International infrastructure was found to be more important than domestic (cf. chapter for critics).

Breisinger (2006) examined the role of different kinds of roads and a hydro power plant for the Vietnamese case. Road investments were found to have “sizable impacts on trade” (ibid: 130) to be explained by “market opening effects”. Urban roads increase exports “while rural roads lead to a stronger increase of imports” (ibid.). On the other hand, rural roads lead also to higher GDP growth than urban roads, mainly driven by agricultural growth, which also contributes to the substitution of imported agricultural goods with domestic agricultural goods. This mechanism facilitates likewise the increase of exports of agricultural goods (ibid. 130ff.). On the contrary, the hydro power plant had mainly positive effects for the other regions as an outcome but to a much lesser degree for the region it was located at.

Van Suntum et. al. (2008) assessed the state of the German Infrastructure with regard to transports, energy and telecommunications and discuss output effects, cost saving effects and effects of holding necessary investments back based on the available stock of literature. Overall infrastructure was frequently found to be an important accelerator of growth with considerable effects even among well developed countries like Germany or the USA. An enterprise survey by Ernst & Young found transport infrastructure even to be considered more important than labor costs (cf. ibid: 25f. footnote 58). Estimated output elasticities in different studies ranged from 0.08 to 0.5 (cf. ibid: 13).[1] This is because infrastructure represents an intermediate product in most production processes and thus, reduces the costs for the private sector, which is thereby stimulated. The effects of lowering infrastructure investments for e.g. the German case were lost growth opportunities of up to 4.1 % for the period from 1990 – 1994 (cf. ibid: 12). In particular, traffic related infrastructure was found to yield very pronounced effects, concerning growth and cost saving effects (ibid: 13ff.). The additional good news for the CEECs is that many traffic related infrastructure projects in this region were even found to yield much higher returns, ranging between 7.1 % and 25.1 %.

Research on Infrastructure for the Romanian Case

Academic Research paper and Study of the Economy of Romania and Romanian Business

For the Romanian case few studies dealt with infrastructure. Hilber & Voicu’s (2006) contribution to agglomeration economics was conducted on county (NUTS-III) level and included also road- and railway densities for the counties, yet without significant results for these two variables. Zaman (2007 a) chooses another approach and calculated an “Index of Infrastructure Availability” (ibid: 9) for the eight Development Regions of Romania (NUTS II). The index considers railway densities plus the ratios of national roads to local roads and modernized roads. This index is a smart way to capture the quality of the regional infrastructure which differs sizable among regions. Unfortunately it was not statistically applied to regional GDP or FDI and only two correlation coefficients are given. The first for regional GDP and road density (.79) and the second for railway density (.93) and regional GDP without clarifying what was about their significance or additional details. The Index of Infrastructure Availability was not deployed for quantitative assessments.


[1] These elasticities mean that in increase of public infrastructure spending by 1 % will yield between roughly 0.1 % and 0.5 % additional GDP growth. Or to put it differently, several projects were found to yield about 173 millions of Euros a year for every billion investment. Assuming an average economic life of 30 years this would imply a net utility gain of some 4.2 billion of Euros (cf. ibid: 15).