Conclusions

In this paper, we investigated the economic impact of cross-border road infrastructure on trade and FDI flows in the GMS. The theoretical underpinnings of the research drew from recent research in the new economic geography and new trade literatures, while the paper’s estimation approach builds on a basic gravity model framework (following Limao and Venables, op. cit.). The paper examined three empirical relationships in the context of GMS economies during the past two decades: 1) the association between cross-border infrastructure development and trade between GMS countries, 2) the relationship between cross-border infrastructure development and FDI, and 3) the association between FDI and trade in goods. In addition, the paper measured the marginal effect of cross-border infrastructure on trade and FDI in addition to the general effect of domestic road infrastructure. The study used detailed data on trade flows across GMS countries and measures of road infrastructure and trade policy indicators that were collected for the study (discussed in the Appendix). Nonetheless, sample size constraints associated both with the relatively small number of countries in the GMS and with missing data problems in several GMS countries, represented serious challenges in carrying out econometric estimates for the research.

Some particularly notable findings regarding the economic effects of cross-border road infrastructure and other variables we investigate include:

1. The average elasticity of trade in major exports likely to be transported by road between GMS economies to developments in cross-border road infrastructure is estimated to be over 0.4. This positive effect of cross-border infrastructure on trade in major goods is identified for infrastructure development on both the exporter and importer sides of the borders.
2. Cross-border infrastructure is found to have an even larger positive effect on ‘major exports’ when a general measure of domestic road infrastructure is included in the model. In this instance, however, the effect of domestic road infrastructure on trade between GMS countries is actually negative. It is only in the trade equation represented by aggregate trade that a net positive effect of both cross-border and domestic road infrastructure is found.
3. Formal trade barriers represented by weighted average tariff rates and trade environments do not appear to influence trade flows significantly. This may suggest a relatively greater impact of unmeasured non-tariff barriers or that the weighted average tariff rates derived understate official or actual tariff rates.
4. Economic and population sizes seem to be the dominant drivers of both trade and investment in road infrastructure, while cross-border road infrastructure has some identifiable influence on trade levels. Results are inconclusive regarding the significance and direction of cross-border road infrastructure’s effect on FDI inflows.
5. We find a positive association between FDI inflows and imports (not reported), suggesting that FDI flows induce further exports from FDI-sending to FDI-receiving economies. This result is consistent with greater flows of raw materials and intermediate inputs needed to run foreign invested operation, anecdotally supported as one outcome of FDI, but may also reflect a loosening of budgets constraints in the face of increased FDI inflows that enable greater imports.

From this study, we conclude that available data suggests the development of cross-border infrastructure in the GMS has played an important role in fostering increased trade within the GMS economies. In addition, empirical findings suggest that such investments have an effect on trade that is distinct from the effect of domestic road infrastructure in general, and that without investments in cross-border infrastructure domestic road infrastructure could actually lead to reduced intra-GMS trade. This is understandable if one considers the role of domestic roads in linking domestic markets to major seaports, which in turn, connect regional economies to the global economy due to the relatively lower cost of ocean freight. In this light, cross-border road infrastructure becomes an important part of a broader effort to encourage regional integration to benefit GMS member economies that are relatively less endowed with natural seaports.

The modeling framework and empirical estimates presented in this paper provide a useful beginning in efforts to estimate some of the key empirical relationships between road infrastructure development, trade, and FDI in the context of the economies of the GMS. Despite difficulties related to the relatively small sample size presented by the GMS economies, the econometric analysis was able to delineate several relationships of interest. But without significant enhancements to the analytical dataset, we must express some skepticism regarding the promise of additional econometric research that makes use of the gravity model approach for the group of countries. Accordingly, extensions of this research could focus principally on considering applied simulation models to generate quantitative estimates of the aggregate economic impact of increases in trade attributable to cross-border road infrastructure development. One relatively simple extension that could help illustrate the implications of the paper’s findings would be to take estimation parameters as given and forecast aggregate trade and GDP effects of future infrastructure investment. However, a more nuanced—and useful—simulation model would require better understanding of the various causal channels through which increased trade translates into economic benefits (i.e. including direct trade-related service outputs and other economic activities indirectly induced through forward and backward linkages). While multi-sector general equilibrium models would be theoretically superior in pursuing estimation of these impacts by country, a useful initial step might be to begin with fixed-coefficient application for estimating these impacts, using input-output tables and social accounting matrices (SAM). The analysis would begin with countries where these existing analytical tools are available, such as Thailand and Viet Nam. Also, some case-specific estimation for benefit-cost incidence can be attempted on, for example, North-South Economic Corridor that involves Thailand, Lao PDR and the People’s Republic of China.¹¹ Analysis of the social and environmental effects of the cross-border road infrastructure is clearly crucial as well. Integrating findings by many researchers regarding social and environmental effects, which have tended to be mainly qualitative, and the findings of econometric analysis of infrastructure development and trade and FDI linkages represents a particularly daunting but important extension of this research.

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