Foreign direct investment and natural resources in Africa

Abstract

Purpose – The purpose of this paper is to investigate the impact of natural resources on foreign direct investment (FDI) in Africa. Decomposing the measures of natural resource, in terms of contribution to GDP (oil rent (OR), mineral rent (MR) and forest rents (FRs)) and export drive (fuel exports (FE) and minerals export), with the objective of obtaining quantitative estimates of their relationship with FDI, we considered the effect of regional or trade blocks on the continent and control for trade openness, financial market development and infrastructure. Design/methodology/approach – Using annual panel data of 49 African countries over the period 1980-2011 and employing the system GMM estimation technique. Findings – The authors show that after allowing for effect of trade or regional block formation, natural resources in its composite form (ORs, MRs, forest rents (FRs), FEs and minerals export) influences FDI in Africa. Quantitatively, we demonstrate that though natural resources (compositely) influences FDI, the different measures of natural resource differ significantly in terms of their marginal contribution in attracting FDI to the continent especially to different trade blocks. The authors provide that in the presence of certain type of natural resources, trade openness or banking sector credit expansion or infrastructural development is less desirable whilst regional or trade blocks strongly moderate the effect of financial market development and infrastructural development on FDI flow on the continent. Originality/value – The authors employed a broad data set to provide evidence of the association between natural resources in its composite form and well as its various component and FDI to African after accounting for regional/trade blocks.