It is now well established that investments in telecom are the most productive of any investments a developing economy can attract — better at increasing per-capita GDP than investments in roads, electricity or even education. So I'm always interested in better understanding what a developing country can do to attrack investment in telecom. The answer is complex, but a few things are clear. Regarding telecom directly: increase competition, reduce restrictions on foreign direct investment (FDI) and reduce taxes on telecom, including less direct costs like spectrum fees and service activation taxes. But also an issue is a business climate that recognizes property rights and minimizes corruption. Just how important is that?
I've seen good data to support the benefits of competition, the good results of reducing restrictions on foreign investment (i.e. on allowing foreign ownership of telecom companies) and the positive gains from reducing telecom taxes. I have been less confident about the issue of good government as China appears to attract enormous flows of FDI despite its government getting consistently bad marks in the western press. What's actually going on?
My thanks to Ajay Shah who pointed out:
The World Bank has produced a draft volume Dancing with Giants: China, India and the global economy, edited by L. Alan Winters and Shahid Yusuf. Six areas are covered: global industrial geography, competing with giants, international financial integration, energy and emissions, regional variations in growth within the giants, and governance.
Groundwork towards this was done in the form of 21 background papers. Drafts of the book, and the 21 background papers, have been placed on the web. It is good work.
In particular, the working paper Does ‘Good Government’ Draw Foreign Capital? Explaining China’s Exceptional FDI Inflow, by Joseph P.H. Fan, Randall Morck, Lixin Colin Xu, and Bernard Yeung, shows that FDI in China correlates extremely well with respect for property rights.
Their conclusion in response to the question: Is too much FDI flowing into China?
We have shown that, within China, inward FDI flows disproportionately into provinces with less corrupt governments and governments that better protect private property rights. We estimate a cross-country FDI model, without China, that explains inward FDI using measures of the strength of constraints on executive power as well as more general measures of government quality and track record in fostering growth and a set of standard controls. This model predicts FDI flow into China with prediction errors similar to those for other countries with similar levels of institutional development...
There is indeed an enormous FDI flow into China, but given China’s size and growth track record, this flow is not far from what would be expected for a country at China’s level of institutional development.
So much as we may dislike government repression, it appears the critical issue for raising people's standard of living is protection for property rights and minimizing government corruption.
In any event, there's a wealth of economic information in these working papers. I'm grateful to Ajay for pointing them out.