FDI Flows in resource-rich countries: does the quality of institutions matter?

Suleiman O. Mamman, Azamat M. Valei

Abstract


Relevance. Foreign investment is likely to be attracted to resource-rich countries because of their wealth of natural resources. However, the fact that foreign direct investment (FDI) contributes less than 10% of these countries’ GDP indicates that FDI has a non-proportional impact when compared to the size of the natural resources. Hence, it is critical to identify the missing link impeding resource optimization through FDI.

Research objective. Given the significance of FDI, the study seeks to ascertain whether the quality of institutions in resource-rich countries influences FDI inflows. This is significant because resource-rich countries may have other factors that encourage FDI but do not result in resource optimization.

Data and methods. The study employed panel data analysis to analyze the impact of FDI on economic growth in resource-rich countries and the role of institutions in attracting FDI. The study relies on the Augmented Mean Group Estimator and on the annual data from the World Bank's World Development Indicator and the World Bank's World Governance Indicator for the top ten resource-rich countries.

Results. Our preliminary evidence indicated that FDI had a positive and significant effect on economic growth in resource-rich countries. The extent of the influence, on the other hand, is minimal for all categories of countries. Our main results revealed that institutional quality has a significant pull effect on FDI, with trade openness playing a key role, particularly in resource-rich nations with well-developed institutions.

Conclusions. We found that institutional quality plays a critical role in attracting FDI, which could have hampered natural resource optimization. Furthermore, countries with high institutional quality and less restrictive investment policies attract more foreign direct investment (FDI) than countries with low institutional quality and with investment policies ranging from moderate to restrictive. In general, resource-rich countries, particularly those with weak institutional qualities, should address the gap in institutional quality to attract more inward investment.


Keywords


institutions; economic growth, FDI, resource-rich countries; panel model, augmented mean group, investment policy, governance

Full Text:

PDF

References


Acharyya, J. (2009). FDI , growth and the environment : evidence from India on co2 emission during the last two decades. Journal of Economic Development. https://doi.org/10.1029/2006GL025923

Ali, F. A., Fiess, N., & MacDonald, R. (2010). Do institutions matter for foreign direct investment? Open Economies Review, 21(2). https://doi.org/10.1007/s11079-010-9170-4

Ato-Mensah, S., & Long, W. (2021). Impact of FDI on economic growth, employment, and poverty reduction in Ghana. Open Journal of Business and Management, 09(03). https://doi.org/10.4236/ojbm.2021.93069

Bénassy-Quéré, A., Coupet, M., & Mayer, T. (2007). Institutional determinants of foreign direct investment. World Economy, 30(5). https://doi.org/10.1111/j.1467-9701.2007.01022.x

Bouchoucha, N., & Ali, W. (2019). The impact of FDI on economic growth in Tunisia: an estimate by ARDL approach. Munich Personal RePEc Archive, 91465.

Buchanan, B. G., Le, Q. V., & Rishi, M. (2012). Foreign direct investment and institutional quality: some empirical evidence. International Review of Financial Analysis, 21. https://doi.org/10.1016/j.irfa.2011.10.001

Carril-Caccia, F., Milgram-Baleix, J., & Paniagua, J. (2019). Foreign direct investment in oil-abundant countries: the role of institutions. PLoS ONE, 14(4). https://doi.org/10.1371/journal.pone.0215650

Chaudhury, S., Nanda, N., & Tyagi, B. (2020). Impact of FDI on economic growth in South Asia: does nature of FDI matters?*This article is an outcome of a project supported by South Asia Network of Economic Research Institutes under 16th RRC. Review of Market Integration, 12(1–2). https://doi.org/10.1177/0974929220969679

Ciobanu, A. M. (2020). The impact of FDI on economic growth in case of Romania. International Journal of Economics and Finance, 12(12). https://doi.org/10.5539/ijef.v12n12p81

Daude, C., & Stein, E. (2007). The quality of institutions and foreign direct investment. Economics and Politics, 19(3). https://doi.org/10.1111/j.1468-0343.2007.00318.x

Drapkin, I., Mariev, O., & Chukavina, K. (2019). Foreign direct investment and institutions: case of emerging economies. In I. B. Ardashkin, B. Vladimir Iosifovich, & N. V. Martyushev (Eds.), research paradigms transformation in social sciences, vol 50. european proceedings of social and behavioural sciences (pp. 290-299). Future Academy. https://doi.org/10.15405/epsbs.2018.12.36

Eberhardt, M., & Teal, F. (2010). Productivity analysis in global manufacturing production. Oxford Department of Economics Discussion Paper, 515.

Eberhardt, M., & Teal, F. (2011). Econometrics for grumblers: a new look at the literature on cross-country growth empirics. Journal of Economic Surveys, 25(1). https://doi.org/10.1111/j.1467-6419.2010.00624.x

Ezeoha, A. E., & Cattaneo, N. (2012). FDI flows to sub-saharan Africa: the impact of finance, institutions, and natural resource endowment. Comparative Economic Studies, 54(3). https://doi.org/10.1057/ces.2012.18

Fifeková, E., & Nemcová, E. (2015). Impact of FDI on economic growth: evidence from V4 countries. Periodica Polytechnica Social and Management Sciences, 23(1). https://doi.org/10.3311/PPso.7993

Gani, A. (2007). Governance and foreign direct investment links: evidence from panel data estimations. Applied Economics Letters, 14(10). https://doi.org/10.1080/13504850600592598

Globerman, S., Shapiro, D., & Tang, Y. (2006). Foreign direct investment in emerging and transition european countries. In International Finance Review (Vol. 6). https://doi.org/10.1016/S1569-3767(05)06017-6

Ibrahim-Shwilima, A. J. (2015). Nonrenewable resources, institutions and foreign direct investments in developing countries. Journal of Natural Resources Policy Research, 7(4). https://doi.org/10.1080/19390459.2015.1091563

Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115(1). https://doi.org/10.1016/S0304-4076(03)00092-7

Kolstad, I., & Wiig, A. (2011). Better the devil you know? Chinese foreign direct investment in Africa. Journal of African Business, 12(1). https://doi.org/10.1080/1536710X.2011.555259

Mariev, O., Drapkin, I., & Chukavina, K. (2016). Is Russia successful in attracting foreign direct investment? evidence based on gravity model estimation. Review of Economic Perspectives, 16(3). https://doi.org/10.1515/revecp-2016-0015

Mariotti, S., Mutinelli, M., & Piscitello, L. (2003). Home country employment and foreign direct investment: evidence from the Italian case. Cambridge Journal of Economics, 27(3). https://doi.org/10.1093/cje/27.3.419

Mehlum, H., Moene, K., & Torvik, R. (2006). Institutions and the resource curse. Economic Journal, 116(508). https://doi.org/10.1111/j.1468-0297.2006.01045.x

Mengistu, A. A., & Adhikary, B. K. (2011). Does good governance matter for FDI inflows? evidence from Asian economies. Asia Pacific Business Review, 17(3). https://doi.org/10.1080/13602381003755765

Mondolo, J. (2019). How do informal institutions influence inward FDI? a systematic review. Economia Politica, 36(1). https://doi.org/10.1007/s40888-018-0119-1

North, D. C. (1990). Institutions, institutional change and economic performance. In The Political economy of institutions and decisions.

Pegkas, P. (2015). The impact of FDI on economic growth in Eurozone countries. Journal of Economic Asymmetries, 12(2). https://doi.org/10.1016/j.jeca.2015.05.001

Peres, M., Ameer, W., & Xu, H. (2018). The impact of institutional quality on foreign direct investment inflows: evidence for developed and developing countries. Economic Research-Ekonomska Istrazivanja , 31(1). https://doi.org/10.1080/1331677X.2018.1438906

Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22(2). https://doi.org/10.1002/jae.951

Sabir, S., Rafique, A., & Abbas, K. (2019). Institutions and FDI: evidence from developed and developing countries. Financial Innovation, 5(1). https://doi.org/10.1186/s40854-019-0123-7

Sajilan, S., Islam, M. U., Ali, M., & Anwar, U. (2019). The determinants of FDI in OIC countries. International Journal of Financial Research, 10(5). https://doi.org/10.5430/ijfr.v10n5p466

Seyoum, B. (2009). Formal institutions and foreign direct investment. Thunderbird International Business Review. https://doi.org/10.1002/tie.20256

Shah, S. H., Ahmad, M. H., & Ahmed, Q. M. (2016). The nexus between sectoral FDI and institutional quality: empirical evidence from Pakistan. Applied Economics, 48(17). https://doi.org/10.1080/00036846.2015.1103039

WGI. (2020). WGI 2020 Interactive > Home. http://info.worldbank.org/governance/wgi/

Wilhelms, S. K. S. (1998). Institutional FDI fitness: Determinants of foreign direct investment to emerging economies. In ProQuest Dissertations and Theses.




DOI: https://doi.org/10.15826/recon.2023.9.1.006

Copyright (c) 2023 Suleiman O. Mamman, Azamat M. Valei

Сertificate of registration media Эл № ФС77-80764 от 28.04.2021
Online ISSN 2412-0731