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

Author

Listed:
  • Grivas Chiyaba

    (Department of Economics, University of Reading)

  • Carl Singleton

    (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.

Suggested Citation

  • 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.
    • Handle: RePEc:rdg:emxxdp:em-dp2022-02
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    File URL: https://research.reading.ac.uk/economics/wp-content/uploads/sites/87/2023/03/emdp202202.pdf
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    More about this item

    Keywords

    Foreign direct investment; Natural resource abundance; Institutional quality;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)

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