Impact of Cross-border Transport Infrastructure on Trade and Investment in the GMS

Abstract

This paper investigates the impact of cross-border transport infrastructure on the economies of the Greater Mekong Subregion (GMS).1 Cross-border and domestic transport infrastructure together can reduce trade costs and lead directly to increased trade and investment. Reduced trade costs can also indirectly induce increased foreign direct investment (FDI) mainly through intra-firm vertical integration across borders that exploits the comparative advantages of each location, and in turn, such increases in FDI can further increase regional trade, adding to the direct effect of trade expansion. This defines a virtuous triangle of mutually reinforcing effects between cross-border infrastructure development, trade, and investment, the final effects of which are higher economic growth and—if necessary institutions and policies are in place to ensure the poor take part in this growth—poverty reduction. Increased trade and growth also expand the fiscal resources available to governments thereby enabling consideration of new policy options (e.g. investments in education, health, or social protection systems).