INVESTMENT DECISIONS IN A REGULATORY FRAMEWORK: THEORY AND EMPIRICAL EVIDENCE

Anastassios GENTZOGLANIS (University of Sherbrooke CEREF)

It is increasingly recognized that productive, technological, management and other inefficiencies are well entrenched in the telecommunications industry of many developing and emerging economies making any reforms at best difficult to implement. In the wake of the telecommunications industry reforms in the industrialized countries and under the pressure from international organizations, some emerging economies went ahead with privatization plans of their telecommunications industries. The path of privatization process has been difficult and different reflecting each country's political, sociological and economic conditions. Countries such as Morocco and Mauritania for example, have partially privatized their telecommunications industry while others (Egypt, Turkey, etc.) opted for state operators with the intention to privatize them at an unspecified later date. Some other countries have attempted to restructure profoundly their industry before privatization (new legislation allowing the creation of independent regulatory bodies, write-offs of stranded costs, competition policy, etc.), while others preferred to adopt an ad hoc approach to privatization (opting for BOOT or other contractual arrangements). Both approaches aim at improving industry's performance in terms of better quality service, innovation (process and service), higher levels of investment in network expansion and better management and pricing practices.

Standard textbook analysis teaches us that investment in infrastructure will increase with privatization and entry. The traditional models ignore, however, the role of regulation and the political and economic contexts within which regulation takes place, especially in emerging economies. Regulation and market conditions are quite important factors in evaluating investment opportunities. Recent theoretical models (Biglaiser and Ma, 1995, 1999), developed in the context of the new regulatory economics, demonstrate that the effects of privatization and entry on investment are at best ambiguous. The purpose of this paper is three-fold. First, to develop a theoretical regulatory model that links privatization and entry to the investment decisions of the incumbent. Second, to empirically examine the relation established in the theoretical model. Third, to provide policy recommendations and highlight the needs for further research. The results of this research are important for policymakers because they shed new light on the issues relating privatization, restructuring and infrastructure development especially for countries with pressing needs for growth and prosperity.