Trade liberalisation and the composition of investment: theory and African application

Trade Liberalisation affects not only the aggregate level of investment but also its composition. We present evidence that African trade liberalisations have been associated with sharp shifts in the composition of investment: investment involving tradable capital goods (equipment) has fallen while investment involving non-tradable (structures) has boomed. The paper presents two models which can account for this compositional change. The combination of imperfect credibility of trade reform in Africa and the switch to structure which ( under full credibility ) is optimal in these models may explain the disappointing export response in African trade liberalisations.