Nonrenewable resources, institutions and foreign direct investments in developing countries

Abstract

In this paper we examine the impact of institutions on attracting foreign direct investment (FDI) in the resource-rich developing countries and compare to the non-resource rich countries. We followed the empirical approach on data from 104 countries covering the period 1995–2010. In this study the institutions are measured by using the indexes of democracy and the rule of law. When these indexes are tested simultaneously we find that the improvement in the quality of democracy promotes FDI to both resource-rich and non-resource rich countries. However, improvement of the rule of law promotes FDI only if the share of nonrenewable resources in total exports is below a certain critical value. Also our findings suggest that resource-rich countries keep attracting FDI regardless of the quality of their institutions. This may explain why some resource-rich countries stay non-democratic and delay in improving the quality in the rule of law.

Keywords:

• democracy
• rule of law
• FDI
• nonrenewable resources

Acknowledgements

I am very grateful to my research supervisor Hideki Konishi for many interesting discussions. I would like to thank the Editor and an anonymous referee for their helpful comments and suggestions. Also, I gratefully acknowledge financial support from the Japanese government for my research in Japan.