The impacts of physical infrastructure on FDI inflows in East African Subregion, Africa and Europe

The focus of this study is to explain the contribution of physical infrastructure in attracting foreign investments in East Africa by referring to Africa and Europe. Thus, the study has used FDI inflow data (total inflows and inflows in specific sectors) for the duration of 2006 – 2014 and seven different types of infrastructures namely road networks, railway and port services, air transportation, electricity supply, mobile telephone subscriptions and internet subscriptions in order to examine the contribution of physical infrastructure in attracting FDI in Europe, Africa and East Africa. The study is designed to test one of the most prominent theories of FDI – Eclectic theory (Dunning, 1988). Therefore, the study employs panel data for FDI inflows in European, African and East African countries for nine consecutive years (2006 – 2014) to examine the trend of FDI inflows against development of infrastructures in control of pillars and sub-pillars of competitiveness as stipulated by Porter, et al, 2007. The study has applied appropriate tools such as Ms Excel, ArcToolbox of ArcMap, Gephi, Space Syntax and Stata for descriptive and inferential analyses. However, in order to link the study with global economic integration theory which is one of the theories underpinning the study; four variables have been generated for the purpose of this study. These are physical infrastructure index in presence of internet, physical infrastructure index in absence of internet, segment angular choice and segment angular integration. The last two were generated by using Acr Toolbox and Space Syntax; while the computation of others used the P2 distance index, a synthetic index that combined indicators of specific infrastructure into a single value. The study has found that physical infrastructure stock is crucial for the inflow of FDI in European, African and East African countries because it facilitate smooth operations of business and maximizes profits as it reduces production costs. Moreover, it has been found that the maximum impact of physical infrastructure to space is exerted when the infrastructure reduces the distance from the specified space to all other spaces in the predefined radius. This phenomenon is well explained by using the impact of segment angular choice and segment angular integration to the inflow of FDI. Thus, effective infrastructure for FDI inflow is the one which facilitate the region to be highly connected (i.e. reduces distance to other places by increasing integration) and allow frequent passages (i.e. becomes the preferred route/ destination and become busier). In that case, the space attains locational advantage to attract more FDI than its competitors.