Research Article: Foreign Direct Investment in oil-abundant countries: The role of institutions

Date Published: April 23, 2019

Publisher: Public Library of Science

Author(s): Federico Carril-Caccia, Juliette Milgram-Baleix, Jordi Paniagua, María Carmen Díaz Roldán.


The present work reassesses the impact of good governance and democracy on Foreign Direct Investment (FDI) in oil-abundant countries. To this end, we estimate the effect of host countries’ institutions on greenfield FDI, using a gravity equation for a dataset that covers 182 countries during 2003-2012. Our findings confirm that compliance to rule of law, lack of corruption, political stability and democracy could boost new FDI links through the extensive margin. Our results could not rule out the “oil curse”, meaning that oil producers attract fewer new greenfield projects than similar countries without oil. Unlike other studies, we show that the impact of institutions is not necessarily undermined by the presence of natural resources.

Partial Text

Recent decades have witnessed ups and downs in oil prices, provoking economic and social instability in oil-abundant countries, serving as a reminder of how important it might be to diversify their economies. Foreign Direct Investment (FDI) could improve these countries’ development as it can bring new technologies, broaden access to new markets through exports, and diversify economic activity. According to [1], FDI is one of the main pillars of development strategies in resource-rich countries as it can also help natural-resource-based activities to foster growth through new skills and technologies.

In the following lines, we perform a battery of robustness checks to support our analysis. Table 3 may suffer from an omitted variable bias since we do not control for the pure effect that oil abundance may have on FDI. Then, the robustness and sensitivity analysis focus on the specification from Table 4. To conserve space, we only comment on the key estimates, namely the coefficients associated to oil production and institutional quality.

The present article, by estimating a gravity equation, addresses how oil abundance, institutions and the interaction between both affects countries’ capacity to foster greenfield investment. To this end, we exploit a greenfield investment bilateral database which covers 182 countries during the period 2003-2012. We use alternative measures of oil production to take into account the dependence of the host on oil production and the dependence of the world on the host’s production. Moreover, we tackle institutions in a broad manner by considering rule of law, corruption, political stability and democracy.