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Natural resources, quality of institutions and foreign direct investment in Africa

Author

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  • Ludovic K. Feulefack

    (Research Fellow, United Nations Economic Commission for Africa, Lusaka)

  • Bertelet S. Ngassam

    (University of Dschang, Department of Public Economics)

Abstract

Several studies have shown that weak institutions discourage foreign direct investment (FDI) inflows. However, an analysis of the World Bank (2019) and UNCTAD (2019) statistics reveal that some countries in Africa, which are heavily endowed with natural resources and having internal conflicts have managed to attract significant FDI. This study seeks to find out whether it is possible that, for the same countries with weak institutions, some foreign investors can be attracted while others are systematically repelled. This concern is analyzed through the Dumitrescu and Hurlin (2012) causality test and the Pool Mean Group (PMG) method, applied to five African oil-exporting countries, between 1996 and 2017. Our study shows that FDI to non-extractive activities are highly sensitive to transparency in the management of natural resources. Our study also finds that dependence on natural resources determines the quality of institutions. Subsequently, the increase in the degree of dependence on natural resources neutralizes the negative effect of the quality of institutions on extractive FDI and conversely, absorbs the positive effect on non-extractive FDI. Then, in the presence of abundant resources, the quality of institutions shatters. Resource-rich countries do not need institutional reforms to attract FDI in the extractive sector, but by diversifying their economies and strengthening their institutions, they will be able to attract more non-extractive FDI.

Suggested Citation

  • Ludovic K. Feulefack & Bertelet S. Ngassam, 2020. "Natural resources, quality of institutions and foreign direct investment in Africa," Economics Bulletin, AccessEcon, vol. 40(1), pages 148-162.
    • Handle: RePEc:ebl:ecbull:eb-19-00895
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    References listed on IDEAS

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    Cited by:

    1. Grivas Chiyaba & Carl Singleton, 2022. "Do natural resources and FDI tend to erode or support the development of national institutions?," Economics Discussion Papers em-dp2022-02, Department of Economics, University of Reading, revised 30 May 2023.
    2. Feulefack Kemmanang, Ludovic, 2021. "Does resource dependence cushion the impact of thin capitalization rules on foreign investment inflows? Evidence from Africa," Resources Policy, Elsevier, vol. 72(C).
    3. Ludovic Feulefack Kemmanang, 2021. "Do thin capitalization rules crowd out multinational firms in Africa? Looking towards efficiency in revenue mobilization," Economics Bulletin, AccessEcon, vol. 41(2), pages 594-603.
    4. Ludovic Feulefack Kemmanang & Jonas Juleo Dongmo Zamké, 2022. "Does the quality of institutions matter for foreign investment concentration in Africa? Understanding the controversial role of international aid," Review of Development Economics, Wiley Blackwell, vol. 26(1), pages 354-374, February.
    5. Armand Totouom, 2021. "Natural resources, economic freedom and Foreign Direct Investment in Africa," Economics Bulletin, AccessEcon, vol. 41(2), pages 764-771.

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    More about this item

    Keywords

    Institutions; natural resources; transparency; FDI; Africa;
    All these keywords.

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • F2 - International Economics - - International Factor Movements and International Business

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