Do natural resources and FDI tend to erode or support the development of national institutions?

Grivas Chiyaba () and Carl Singleton
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Grivas Chiyaba: Department of Economics, University of Reading

No em-dp2022-02, Economics Discussion Papers from Department of Economics, University of Reading

Abstract: This paper explores the relationships between natural resources, foreign direct investment (FDI) and the quality of national institutions, also known as ``the rules of the game''. Using a data set of 69 developing countries over the period 1970–2015 to estimate a dynamic panel data model, we find negative and significant effects of natural resources use or extraction on the development of national institutions. We focus on legal and property rights, but these findings also apply to the quality of some other national institutions. Our results align with a theory that abundant natural resources lead to weakened institutions because of the potential for firms to secure monopoly rents. Further, we find that the effects of FDI inflows on institutional development are not robust to controlling for natural resources rents. This suggests that the latter tend to erode institutions regardless of whether those resources are exploited alongside increased foreign investment into the local economy.

Keywords: Foreign direct investment; Natural resource abundance; Institutional quality (search for similar items in EconPapers)
JEL-codes: F21 O13 O17 Q33 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2022-02-18, Revised 2023-05-30
New Economics Papers: this item is included in nep-env, nep-fdg and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations:

Forthcoming in The World Economy, https://doi.org/10.1111/twec.13447

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Persistent link: https://EconPapers.repec.org/RePEc:rdg:emxxdp:em-dp2022-02

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