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Ludovic K. Feulefack and Bertelet S. Ngassam
''Natural resources, quality of institutions and foreign direct investment in Africa''
( 2020, Vol. 40 No.1 )
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.
Keywords: Institutions, natural resources, transparency, FDI, Africa
JEL: O1 - Economic Development: General
F2 - International Factor Movements and International Business: General
Manuscript Received : Oct 11 2019 Manuscript Accepted : Feb 05 2020

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