Vit Henisz
Guy Holburn
Bennet Zelner

UC Berkeley

Contact: zelner@haas.berkeley.edu

ABSTRACT

We propose to present a cross-national empirical analysis of telecommunications firms' infrastructural
investment decisions. The specific hypotheses that we test in this analysis focus on the degree to which a
country's political, legal and judicial institutions--i.e., its institutional environment--are able to create
checks and balances against government expropriation, and thereby induce investment in infrastructure.

Concern over the effects of potential government expropriation on investment can be traced back to the
writings of Aristotle, Montesquieu, Madison and Smith. However, it is only recently that the academic
literature in economics has begun to treat such effects in a systematic way. This literature has been
useful for generating hypotheses, and it has also provided some empirical support for these hypotheses in
the form of case studies and simple econometric analyses using highly aggregated data. However,
application to industry- or firm-level investment decisions is still almost nonexistent at this point in time.

One notable exception in this regard is Levy and Spiller (1994), who undertake a case study of
telecommunications privatization in five countries. Telecommunications is a natural object for study of
the relationship between a country's commitment ability and firm-level investment behavior as the result
of its heavy infrastructure requirements and large sunk costs. Based on their case studies, Levy and
Spiller isolate three institutional variables which explain much of the variance in firm performance in
their sample: (1) the existence of an independent, non-corrupt and respected judiciary; (2) the number of
checks and balances on executive power including a Constitution, democratic elections, multiple
chambers of Parliament, multiple levels of government, and international constraints; and (3) the
existence of an independent, non-corrupt and respected professional bureaucracy and other relevant
societal norms

While intriguing, Levy and Spiller's work still suffers from the same drawback that all case studies do,
specifically, a lack of statistical rigor. Our paper addresses this problem directly. We perform
econometric tests of commitment hypotheses related to those of Levy and Spiller and others using time-
series data on over 100 different countries during the period 1960 - 1995. Our data include various
measures of telecommunications infrastructure investment, the price of telecommunications services,
and relevant economic and demographic variables. Additionally, we use more objective measures of
institutionally-based credibility than has previous work, which generally relies on subjective indices of a
government's commitment ability. Furthermore, as alluded to above, our analysis also differs from
previous work in that we focus on telecommunications in particular, as opposed to aggregate measures
of national investment.

In addition to illuminating the received hypotheses from existing theory, our analysis aims to provide
econometric results that can be used to push the theory forward. For example, most existing hypotheses
say nothing specific about the degree to which persistence of a country's institutions over time create a
perception of stability that leads to increased investment. Similarly, most existing hypotheses say little
about the timing of the game between governments and investing firms, i.e., is this game best modeled
as a static game, as a finite game with multiple stages, or as an infinitely repeated game? Using simple
theoretical models and sophisticated econometrics, we hope to shed light on these issues as well.