ارائه زیرساخت های عمومی، سرمایه گذاری خارجی و رفاه بر اساس تخصص در حضور اقتصاد خارجی

It is widely believed that provision of production infrastructure, among other things, attracts foreign investment. In the context of a small open economy model where monopolistic competition prevails in the intermediate good sector, this paper focuses on the impact of changes in the supply of a public good on foreign investment and welfare. From the point of view of producers, the public good is akin to public infrastructure that reduces the fixed cost associated with the production of the intermediate good. The presence of monopolistic competition in the intermediate good sector gives rise to specialisation-based external economies in the industrial good. The size of these economies affects the magnitude of all comparative static responses presented in this paper. It is shown that an increase in the supply of the public good decreases foreign investment as long as the public good is more (or equally) capital intensive as compared to the agricultural good and the industrial good is more (or equally) capital intensive as compared to the intermediate good. In the absence of specialisation-based external economies, an increase in the supply of the public good leads to an unambiguous decrease in welfare.

The end of the cold war and rapid improvement in communication technology during the 1980s has resulted in a significant increase in capital flows across international boundaries. It is well known that almost 50% of the US foreign investment takes place in Europe and vice versa (see Appleyard et al., 2006). During the last two decades, there has been a significant increase in foreign investment in developing countries. Since the Asian financial crisis of 1997–1998, China has become a major recipient of foreign investment. Rapid economic growth experienced by countries such as Malaysia and Thailand before 1997–1998 can be attributed to significant capital inflows.1 It has been argued that a number of Southeast Asian economies were successful in attracting significant amount of foreign investment because of, among other things, the availability of modern production infrastructure (see Lipsey, 2003 and Hill, 2005). Production infrastructure can be viewed as a public input that reduces private sector's cost of production. A number of available studies have attempted to measure the productivity of public infrastructure. These studies include Aschauer (1989), Otto and Voss, 1994 and Otto and Voss, 1998, Holtz-Eakin and Lovely (1996), Morrison and Schwartz (1996), Lau and Sin (1997), Paul (2003) and Cohen and Paul (2004).2Delorme et al. (1999) have found a negative relationship between public infrastructure and technical efficiency. Berndt and Hansson (1992) have attempted to measure the contribution of public infrastructure in Swedish economy. Kim (1998) examined the effect of infrastructure investment on Korean economy. He concluded that infrastructure investment has resulted in economic growth and inflation. Feltenstein and Ha (1999) have attempted to measure the impact of public infrastructure on Mexican GDP. Rioja (1999) has shown that public infrastructure investment can lead to a sizeable increase in GDP. Boisso et al. (2000) attempt to measure the impact of changes in public infrastructure provision on slowing down of the US productivity. Lin (2001) examines the impact of public infrastructure provision on economic development in some regions of China. Moreno et al. (2002) have attempted to distinguish between short- and long-run effects of public infrastructure. Salinas-Jimenez (2004) has considered the impact of public infrastructure investment on productivity and efficiency in Spanish regions. By estimating a translog cost function, Teruel and Kuroda (2005) have attempted to measure the contribution of public infrastructure in Philippines agriculture sector. They concluded that by reducing the cost of production, public infrastructure has enhanced the productivity in Philippines' agricultural sector. Krol (2001) provides an excellent summary of the existing literature, which suggests that reduction in congestion and adequate maintenance contribute to grater benefits from public infrastructure. By making use of the Greek data, Rovolis and Spence (2002) have shown that public infrastructure and private capital are complementary. However, Reinikka and Svensson (2002) have shown that poor public capital significantly reduces the complementary private investment. Boarnet (1998) argues that due to negative spillover effects, public infrastructure investment can lead to growth in one sector at the expense of the other. Demetriades and Mamuneas (2000) have examined the impact of public infrastructure on production and input demand in 12 OECD countries. Their work shows that increased spending on public infrastructure is associated with higher levels of production. They also found a positive relationship between the demand for inputs and the supply of public infrastructure. Kemmerling and Stephan (2003) argue that public infrastructure makes significant contribution to the private sector production. Paul et al. (2004) have examined the impact of public infrastructure on Canadian manufacturing industries. Fumagalli (2003) has considered the welfare effect of competition for foreign investment. Hoffmann (2003) empirically examines the link between the supply of public infrastructure and capital inflows. By making use of fairly disaggregated cross-sectional data, Hoffmann concludes that there is a positive relationship between the supply of public infrastructure and capital inflow. In summary, the existing largely empirical literature has examined the impact of public infrastructure on efficiency, production, GDP and capital inflow. What seems to be lacking is a theoretical underpinning of certain empirical results. This paper can be viewed as an attempt to rectify this gap in the existing literature. In addition, by utilising a fairly general but simple model of a small open economy, this paper attempts to bring the role of specialisation-based external economies into a sharp focus which does not appear to have been considered by the existing literature. This paper utilises a framework that mainly combines elements of Din (1996), Holtz-Eakin and Lovely (1996) and Markusen and Venables (1999). Din (1996) has considered the impact of development policy on capital inflow in the context of a small open economy but his model does not include a public sector and all goods are produced under competitive conditions. Holtz-Eakin and Lovely (1996) have utilised a model that includes a public sector and where specialisation-based external economies are present but there is no foreign investment. Markusen and Venables (1999) have considered the role of foreign investment in economic development in the presence of imperfect competition but their framework does not include a public sector. This paper focuses on an economy that produces one industrial, one agricultural good and one public good. Producer services (i.e., the intermediate good) sector of the economy is characterised by internal economies of scale, which result in specialisation-based external economies to the producers of the industrial good. From the point of view of the producers of the intermediate good, the public good is akin to public infrastructure, which serves to reduce the fixed cost. The model is relevant to a newly industrialised or high-income developing country where some sectors operate under conditions of monopolistic competition and unemployment is not a serious problem. In addition, high-income developing countries such as Malaysia and some newly industrialised countries such as Hong Kong and Singapore are going through a phase where the share of the services sector in overall economy is increasing. The framework utilised by this paper allows one to examine the impact of changes in the supply of the public good on various economic variables including prices, production, foreign investment and welfare. The results presented in this paper crucially depend on the size of the specialisation-based external economies enjoyed by producers of the industrial good. By assuming that the public good is more (or equally) capital intensive as compared to the agricultural good, the paper shows that an increase in the supply of the public good increases wage–rental ratio, price of the intermediate good and production of the industrial good. Due to the presence of specialisation-based external economies, the impact of an increase in the supply of public good on production of the agricultural good cannot be unambiguously determined. An increase in the supply of the public good decreases foreign investment if the industrial good is more (or equally) capital intensive as compared to the intermediate good. In addition, the paper derives a condition under which an increase in the supply of the public good can increase welfare. The rest of the paper is organised as follows. A simple general-equilibrium model of a small open-economy is presented in Section 2. The impact of changes in the supply of public good on foreign investment, production, prices and welfare is examined in Section 3 whereas the last section contains some concluding remarks.

Massive foreign investment in Southeast Asian economies such as Hong Kong and Singapore has been attributed to, among other things, provision of modern production infrastructure. This paper examines the impact of changes in the supply of a public good, which is viewed by some producers as public infrastructure, on a number of economic variables including foreign investment and welfare. The results presented in this paper are based on a simple model of a small open economy that produces one industrial, one agricultural and one public good. The industrial good is produced by means of foreign capital, domestic labour and a large number of varieties of an intermediate good. Varieties on the intermediate good, which can be considered as producer services, are produced by means of foreign capital and domestic labour. The public and the agricultural goods are produced by means of domestic capital and domestic labour. The public good can be viewed as a composite good which is available to all consumers and it also serves to reduce the fixed cost associated with the production of varieties of the intermediate good. The public good and the varieties of the intermediate good are non-traded. All goods except the varieties of the intermediate good are produced under conditions of perfect competition. Due to the presence of internal economies, varieties of the intermediate good are produced under Chamberlinian monopolistic competition. The presence of internal economies in the intermediate good sector gives rise to specialisation-based external economies in the industrial good sector. The paper focuses on the role of these external economies. It is shown that an exogenous increase in the supply of the public good increases the wage–rental ratio and the price of the intermediate good if the public good is equally (or more) capital intensive as compared to the agricultural good. These results crucially depend on the size of specialisation-based external economies—in the absence of external economies, variations in the supply of the public good have no effect on wage–rental ratio and the price of the intermediate good. An increase in the supply of the public good decreases the production of each variety but its impact on the number of varieties produced is positive which reflects a decrease in the degree of monopoly power in the intermediate good sector. An increase in the supply of the public good increases the production of the industrial good but its impact on the production of the agricultural good cannot be unambiguously determined. However, in the absence of specialisation-based external economies, an increase in the supply of the public good leads to an unambiguous decrease in the production of the agricultural good. Irrespective of the size of specialisation-based external economies, an increase in the supply of the public good leads to a decrease in foreign investment if the industrial good is capital intensive as compared to the intermediate good and the public good is capital intensive as compared to the agricultural good. However, in the presence of specialisation-based external economies, an increase in the supply of the public good decreases foreign investment even if all goods were equally capital intensive. An exogenous increase in the supply of the public good can increase foreign investment only if (a) the public good is labour intensive as compared to the agricultural good, or (b) the industrial good is labour intensive as compared to the intermediate good, or (c) both the public and the industrial goods are relatively labour intensive. In the absence of specialisation-based external economies, an increase in the supply of the public good leads to an ambiguous decrease in welfare. It is argued that although an increase in supply of the public good increases productivity in the industrial good sector, its overall impact on welfare can still be negative. The paper also derives a necessary condition under which an increase in the supply of the public good can increase welfare.