A Micro & Macro Study of Infrastructure Development: Evidence from BRICS Countries

Abstract

Infrastructure is vital for economic growth and overall sustainability of the nation. Infrastructure development reduces poverty, enhances regional competitiveness and creates employment. Nation’s competitive advantage can be achieved by optimal infrastructure investment and development. Monitoring of infrastructure development is critical for inclusive development of the nation. Infrastructure can be divided into energy, water, transportation and telecommunication infrastructure. Education and health infrastructure are also major sub categories of infrastructure. There is a requirement of infrastructure development in developing countries.
Developed countries focus more on maintenance of existing infrastructure structures. Optimal infrastructure investment is a key for quality directed and advantageous infrastructure development. In developing countries, the government is a key player in initiating and maintaining infrastructure development. Therefore, the major chuck of financing should come from government. Private players should be attracted to invest more in infrastructure sector through lucrative risk-return schemes.
The motivation of the study is basically to explore and examine infrastructure and related areas in a comprehensive manner. Infrastructure is under provided in many nations. There is a big gap between demand and supply of infrastructure. Infrastructure is also over provided in many countries and there is a requirement of optimal provision of infrastructure. Nations’ growth is positively impacted by infrastructure development. Thus, the study will attempt to depict importance and relevance of infrastructure. The study will provide solution to research problems concerning infrastructure taking India and other BRICS nations. BRICS nations have
comparable economic and social condition. BRICS have comparable per-capita income. BRICS are developing nations and exhibit similar infrastructure development scenario.
Infrastructure financing, infrastructure investment and development of infrastructure form the foundation of the study as there are limited studies covering these mentioned domains. The impact of infrastructure at macro level and micro level is relatively explored but robustness and consistency of results are questionable. Thus the impact of infrastructure at macro and micro level also forms the vital part of study’s research questions. At micro level the study links leverage with infrastructure firms’ investment in India and also links foreign investment with infrastructure firms’ performance in the Indian context.
The study investigates infrastructure and ecosystem relating to infrastructure. The impact of infrastructure investment and development are examined at macro and micro level. The study develops four objectives to find solution to research questions with the application of time series regression analysis, panel data regression analysis and infrastructure index construction methodology.
The study applies quantitative data collection and data analysis methods. These mentioned methods come under empirical research methods. The research questions forms the foundation of study’s four broad objectives. The study considers water, energy, transportation and telecommunication infrastructure for investigation. The data for infrastructure firms in India are collected from Prowess database. The macro economic variables data set representing BRICS nations are collected from Worldbank data base. The data set is analyzed with Eviews and Stata software.
The first objective examines the impact of leverage on firms’ investment. The research question for the first objective is; what is the status of performance of infrastructure firms in India? What is the effect of leverage on infrastructure firms’ investment in India? The study also explores some of the vital theories relating to this objective. These theories are agency theory, trade off theory and pecking order theory. This objective considers India for examination. The sample includes 379 infrastructure companies and time period varies from 2011 to 2017. Panel data
analysis is applied for examination. The techniques applied under panel data analysis are fixed effect, random effect and ordinary least square techniques. The study detects that leverage has an insignificant impact on the infrastructure firms’ investment.
The second objective investigates the impact of foreign investment on firm’s performance. The research question for second objective is; what is the impact of foreign investment on infrastructure firms’ performance in India? This objective considers India for investigation. Some of the foreign investment theories are the base for this objective. These theories are perfect competition theory of FDI and imperfect market theories of FDI. Imperfect market theories include monopolistic power theory, industrial organization approach, strength of currency, international trade, oligopolistic theory, internalization theory and discriminating paradigm to FDI. The sample includes 329 infrastructure companies and time period considered from 2011-2019. Panel data analysis is applied for examination and estimation. The
techniques applied under panel data analysis are GMM, fixed effect, random effect and ordinary least square techniques. The findings suggest that increase in foreign investment significantly impacts the infrastructure firms’ performance. These significant impacts are generally positive in many cases. In few cases these significant impacts are negative.
The third objective examines the impact of infrastructure on economic growth. This impact is examined taking individual nation within BRICS separately and by taking all nations of BRICS together. The research question for third objective is; what is the status of infrastructure development and advancement in India and other BRICS nations? What is the effect of infrastructure on economic growth in India and other BRICS nations? Few of the vital theories on economic growth are Romer theory, Schumpeter theory, Lewis theory and Rostow theory. Munnel (1992) and Aschauer (1989) execute critical researches on relationship between infrastructure and economic growth. This objective considers BRICS nations for examination. The time period comprises from 1980 to 2017. The study applies both time series analysis and
panel data analysis for examination. The findings of time series analysis suggest that the relationship between infrastructure and economic growth is insignificant for South Africa and Brazil. Transportation and energy infrastructure positively impacts economic growth for Russia. Telecommunication infrastructure negatively impacts economic growth for India. Transportation infrastructure negatively impacts economic growth for China. The findings of panel data analysis suggests that telecommunication infrastructure negatively impacts economic growth whereas energy infrastructure positively impacts economic growth.
The fourth objective constructs infrastructure index and infrastructure sub-indices. This part also examines the impact of infrastructure index on economic growth taking ordinary least square method (time series analysis). The infrastructure index is formulated by considering water, energy, transportation and telecommunication infrastructure. The validation of results also involves few necessary tests like jarque-bera test of normality, breusch-pagan-godfrey heteroscedasticity test, correlation test and breusch-godfrey serial correlation LM test. The research question for the fourth objective is; what is the process of infrastructure index and
infrastructure sub-indices formulation? What is the impact of formulated infrastructure index on economic growth? The prominent researches by Donaubauer et al. (2016) and McNeil et al.(2010) focus on construction of infrastructure index. The sample includes BRICS countries and time period ranges from 1984-2016.Transportation and telecommunication index depict increasing trend of growth from 1984 to 2016. Water index shows a decreasing trend from 1984-1991. Water index also shows increasing trend for rest of the time period 1992-2016. Energy index depicts increasing trend from 1984 to 1991. Energy index also shows decreasing trend from 1992-1999 followed by increasing trend for rest of the time frame 2000-2016. The final infrastructure index depicts increasing trend from 1984-2016. The study finds that the impact of infrastructure index on economic growth is insignificant.
Theoretical implications
The study contributes to studies concerning infrastructure, economic growth, infrastructure index, leverage, performance and foreign investment. The variables representing above mentioned heads differ according to study’s objective. The variations in relationship between variables are understood and interpreted by the study. Infrastructure generally positively impacts economic growth but the study also observes contradictory results. The study formulates infrastructure index to monitor progress to infrastructure in BRICS nations. There is an insignificant relationship between infrastructure index and economic growth. The impact of leverage on firm’s investment and impact of foreign investment on firm’s performance are also examined. Leverage has an insignificant impact on firm’s investment. Foreign investment has a significant impact on firm’s performance. There is a requirement of optimal infrastructure investment and development to positively impact economic growth. Infrastructure index varying over time period should positively impact economic growth. Foreign investment should positively impact infrastructure firms’ performance. Leverage should be optimally taken so that the impact of infrastructure firms’ investment is not negative.
Practical implications
The study’s findings are helpful to both managers and government as the study provides insight to them regarding infrastructure development scenario in developed nations and developing nations. The study especially focuses on India and BRICS nations. According to the study’s findings, managers need to be careful in choosing level of leverage for infrastructure firms in India. The managers also need to be cautious about choosing the level of foreign investment for infrastructure firms in India. Government should focus on optimal level of infrastructure investment in sub sectors of infrastructure. Government should avoid over and under infrastructure investment. The government should track progress of development and impact of infrastructure on economic growth by using the infrastructure index.
Value/ Originality
The study is novel as it examines impact of infrastructure both at macro and micro level taking time series analysis, panel data analysis and infrastructure index formulation. The study is unique as it considers India and BRICS nations for analysis. The impact of leverage on infrastructure firms’ investment and impact of foreign investment on infrastructure firms’ performance in India makes the study comprehensive.