A Sloan Foundation Center

on the Telecommunications Industry

Contracting for Credibility

in International Telecommunications Investments

CITI Workshop

141 Uris Hall, Columbia Business School

Friday, October 6, 2000

12:00 to 2:00PM

Can foreign investors and governments in developing countries

'contract around' commitment hazards?

Extensive literature supports the inverse correlation between credibility and uncertainty, confirming that the more credible a government and its institutions, the less investor uncertainty exists. Likewise, it is conventionally understood that credibility positively affects investment. Employing empirical evidence from government institutions and investment contracts in telecommunication sectors, this project analyzes the strategic dynamics of investment contracting between foreign investors and governments in developing countries. It argues that institutional credibility (alongside market opportunity) positively affects private investment, specifically foreign private investment. Because each state possesses a certain level of institutional credibility, investors require a minimum amount to safeguard their investment. In the absence of minimum credibility, investors and states devise strategies to overcome credibility gaps either by securing specific policy changes or, more feasibly, by implementing specific credibility-enhancing mechanisms within the contracting process. By examining the comparative utility of different gapfilling mechanisms and the empirical variation of international telecommunications investments in 176 developing countries between 1984 and 2000, this project explicates how, when, and to what success investors and states contract for credibility.

Allison Fine (Columbia University and Yale Law School)