Natural Resource Rents and Capital Formation Nexus: Empirical Evidence on Foreign Direct Investment as a Moderator from the BRICS Economies

This study investigates the impact of natural resource rents (natural gas, forests, minerals, and oil) on capital formation in BRICS economies from 1990 to 2023. It focuses on the importance of natural resource rents and their influence on capital formation in Brazil, Russia, India, China, and South Africa. Foreign direct investment (FDI) is included as a moderating factor. Using the method of moment quantile regression (MMQR), the study finds that higher natural resource rents reduce gross fixed capital formation (GFCF) in the upper quantiles. In contrast, FDI dampens these adverse effects and strengthens the positive impact on GFCF in the upper quantiles. Granger causality analysis reveals that natural gas rent, FDI, GDP, trade openness, domestic investment, and institutional quality all affect capital formation, with feedback relationships evident. There is unidirectional causality from forest rent and mineral rent to capital formation, and from capital formation to inflation and financial development. Propensity score matching (PSM) indicates that BRICS economies with higher FDI also have higher GFCF, owing to FDI’s influence on resource rents. The seemingly unrelated regression (SUR) analysis for cross-country comparison indicates that Russia has higher NGR, FR, and OR, resulting in more pronounced negative changes in Russia’s capital formation than in India. Additionally, the results of the SUR analysis indicate that China’s higher NGR, FR, and OR are associated with larger adverse changes in capital formation than those in Russia. The findings from additional analysis using the PSTR model, with gross capital formation as the dependent variable, indicate that when institutions are weak, natural resources reduce gross capital formation and foreign investment in resource sectors yields minimal spillovers. However, when institutions are stronger, natural resources are used productively, and investment from outside the resource sector yields broader benefits, boosting GCF. Moreover, robustness checks using panel fixed-effects regression and endogeneity analysis with a system GMM estimator show that higher natural resource rents are associated with weaker capital formation, and that FDI mitigates the negative influence of natural resource rents as a moderating factor. These empirical results can inform policy recommendations on natural resource rents and FDI to achieve high capital formation in BRICS economies.