Political Institutions and Electric Utility Investment: A Cross-Nation Analysis

Abstract

While cross-border investment flows are surging to levels not witnessed since before the Great Depression, the evaluation of political risk inherent in these projects has changed little since the 1960s. Since 1983, foreign direct investment inflows to developing countries have increased five-fold. From 1989 to 1992, the stock of American affiliates infrastructure assets grew by 153% leading to the share of total assets invested in infrastructure doubling from 1.6% to 3.0%. While this is but a fraction of the peak of 22% reached in 1940, recent research by the World Bank suggests that more than $2.0 trillion of new infrastructure will be required in East Asia and Latin America alone during the next ten years1. As developing countries have increasingly reopened their doors to foreign capital for such projects, multinational corporations need to carefully weigh the potential costs and benefits of reentering markets in which previous waves of investments were expropriated.

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