The Mediating Role of Infrastructure Vulnerability on the Political Risk of Foreign Infrastructure Investment in Developing Countries: Insights from Brazil and China

Abstract

Foreign infrastructure investment (FII) is essential to the economic growth of developing countries. However, developing countries are prone to higher levels of political risk, which act as detractors to such investment. The nature of political risk has been well documented and includes such factors as corruption, inadequate legal protections, opaque regulatory processes, and unstable governments prone to volatile shifts in project support. Even so, the impact of political risk on FII does not arise from environmental factors alone, but also emanates from the internal attributes of the infrastructure delivery system; which is to say not all projects are impacted to the same extent by a given political climate. Although the external political risk environment has been extensively explored, the internal vulnerabilities are not well understood. This study identifies the impacts of foreign infrastructure vulnerability on FII and its mediating capacity in offsetting the adverse effects of political risk on FII in developing countries. It draws on a database of China and Brazil from 2006 to 2019, as exemplars of developing nations. A partial least-square structural equation model (PLS-SEM) method is employed in analyzing the database against existing system vulnerability factors as identified: political risk exposure of the system, system’s capability of dealing with political risk, and the relationship between host and home countries. The findings confirm that, ceteris paribus, FII flows are hindered when infrastructure projects carry higher risk exposure. Moreover, where systems possess the capacity to mediate political risk, FII participation is facilitated, while also diluting the negative impacts of that risk on the delivery system. These findings add to the body of knowledge in the domain of vulnerability theory, while offering a practical political risk management pathway for multination investors.