DP8079 Do Natural Resources Attract FDI? Evidence from Non-Stationary Sector-Level Data

Author(s): Steven Poelhekke, Frederick van der Ploeg
Publication Date: October 2010
Keyword(s): co-integration tests, external margin, hydrocarbon reserves, outward sector level FDI, sample selection bias, spatial econometrics, subsoil assets
JEL(s): C21, C33, F21, Q33
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8079

A new and extensive panel of outward foreign direct investment (FDI) at the sector level is used to estimate the determinants of non-resource and resource FDI. Since FDI is I(1), we estimate panel error-correction models of FDI with spatial lags for FDI and market potential. Our main result is that subsoil assets boost resource FDI, but crowd out non-resource FDI. The effect on non-resource FDI dominates, so that aggregate FDI is less in resource-rich countries. Spatial lags aggravate this crowding out of non-resource FDI. In addition, we find that (i) resource FDI is mainly vertical whereas other FDI is of the export-fragmentation variety; (ii) trade openness, free trade agreements and institutional quality do not impact non-resource FDI but institutional quality does have a positive effect on resource FDI; and (iii) the short-run dynamics comes mostly from shocks to FDI itself. Our main and ancillary results are robust to different measures of resource reserves and the oil price and to allowing for sample selection bias.