Natural Resources, Quality of

Institutions and Foreign Direct

CONSORTIUM POUR L A RECHERCHE ÉCONOMIQUE EN AFRIQUE

Investment in Sub-Saharan

A F R I C A N E CO N O M I C R E S E A R C H CO N S O R T I U M
Africa
Feulefack Kemmanang Ludovic
Ngassam Sylvain Bertelet

Research Paper 421

Bringing Rigour and Evidence to Economic Policy Making in Africa

 Natural Resources, Quality
of Institutions and Foreign
Direct Investment in Sub-
Saharan Africa

By

Feulefack Kemmanang Ludovic and Ngassam Sylvain Bertelet

University of Dschang-Cameroon
Université de Yaoundé II Soa, Cameroon

AERC Research Paper 421

African Economic Research Consortium, Nairobi
March 2021
THIS RESEARCH STUDY was supported by a grant from the African Economic Research
Consortium. The findings, opinions and recommendations are, however, those of
the author and do not necessarily reflect the views of the Consortium, its individual
members or the AERC Secretariat.

Published by: The African Economic Research Consortium

P.O. Box 62882 - City Square
Nairobi 00200, Kenya

ISBN 978-9966-61-119-2

© 2021, African Economic Research Consortium.

Contents
List of tables v

Abstract vi

1. Introduction 1

2. Review of the literature 5

3. Methodology 8

4. Results and discussions 18

5. Conclusion 27

References 28

Notes 33
List of tables
1 Weight of the components of the institutional quality index 9

2 Homogeneity tests 13

3 Pesaran test CD 14

4 Pesaran unit root test (2007) or Pesaran CIPS test 14

5 Unit root test of Maddala and Wu (1999)

[with specification without trend] 14

6a Co-integration test on the relationship with extractive FDI 15

6b Co-integration test on the relationship with non-extractive FDI 16

7 Dumitrescu and Hurlin (2012) homogeneous causality test results 18

8 Effect of institutional quality on extractive FDI 21

9 Effect of institutional quality on non-extractive FDI flows 24

Abstract

An analysis of statistics on foreign direct investment (FDI) inflows reveals that some
countries in sub-Saharan Africa (SSA), which are heavily endowed with natural
resources and have internal conflicts, have managed to attract significant FDI. This
study sought to determine whether it is possible that, for the same countries with
weak institutions, some foreign investors can be attracted to invest in them while
others are systematically repelled. We found that weak institutions are favourable
to FDI inflows into the extractive sector, while they crowd out FDI into other sectors.
Thus, resource-rich countries do not need institutional reforms to attract FDI.

Keywords: FDI, institutions, EITI, natural resources, PMG.

Introduction
One of the major challenges of sub-Saharan Africa (SSA) is to find ways to finance
its development. To this end, several countries in the region have opted for the
attractiveness of foreign direct investment (FDI); especially in view of the spectacular
economic growth of the countries of South-east Asia due to this capital. FDI is indeed
considered as likely to induce transfers of capital, technology and know-how, and, in
addition, it does not create debt. With the reforms initiated, going as far as creating
an investment promotion agency in 20 years (1996–2016), SSA has witnessed its share
of total FDI double. However, despite everything, the SSA share remains seven and
22 times lower than that of developing economies of America and Asia respectively
(UNCTAD, 2017).

Why does capital go so little towards an area that is

sorely lacking?

Several empirical studies argue that weak institutions are the main reason explaining
why Sub-Saharan Africa appears as a typical example of the Lucas paradox. It
means that the poor quality of institutions discourages investors as it constitutes
an additional barrier to FDI inflows (Aleksynska and Havrylchyk, 2012). In particular,
corruption imposes additional costs to investors and increases uncertainty about
future costs and returns on investment (Wei, 1997, 2000; Wei and Shleifer, 2000;
Hellman et al., 2002; Javorcik and Wei, 2009; Belgibayeva and Plekhanov, 2015). In
Cameroon, for example, the unfair competition occasioned by cigarettes from Nigeria,
which fraudulently crossed borders through corruption, caused the foreign-owned
British American Tobacco company to close its factories and relocate to neighbouring
Nigeria. Similarly, a poor definition of property rights, the impartiality of justice and the
risks of expropriation have also been important disincentives (Warrick and Hallward,
2005), as noted in Zimbabwe (Gwenhamo, 2009) and also in the former Zaire, with
the brutal nationalization of foreign companies by Mobutu’s government. In addition,
political instability increases the uncertainty of returns on investment, forcing foreign
investors to choose other destinations (Alesina and Perotti 1996; Kaufman et al., 1999;
Basu and Srinivasan 2002; Chan and Gemayel, 2004). This indicates that good quality
institutions attract FDI and poor quality pushes them back (Dunning, 2002, Brindusa,
2005; Stein and Daude, 2007; Julio et al., 2013; Komlan, 2016).

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2 Research Paper 421

Surprisingly, Iraq and Afghanistan have recorded increases in peak FDI inflows
amid conflicts, and statistical analysis on the World Bank (2017) and UNCTAD (2017)
data showed that several SSA countries have also attracted large volumes of FDI
during periods of socio-political instability. In South Africa, despite the tensions and
hostilities observed during the second half of apartheid (from 1970 to 1991), inflows
of FDI accounted for 40%, 48% and 42% respectively of the total FDI for SSA in 1970,
1974 and 1984. In Sudan, throughout the 25 years (from 1980 to 2005) of the second
civil war, inflows of FDI steadily increased at the average annual rate of 24.91%. This
country also recorded the largest flows in its history (2.5 billion dollars) in 2006, during
the Darfur war, often compared to genocide. Throughout its 27-year civil war1, Angola
saw its inflows of FDI increase, on average, by 47.1% annually. Despite the troubles
that accompanied the fall of Mobutu, inward FDI in the Democratic Republic of Congo
(DRC) increased by 238% from 1997 to 1998. As if the proliferation of rebel formations
and the unrest observed in the following years was insignificant, FDI entering the
DRC increased at an average rate of 37% between 1999 and 2004 and then 45.8%
between 2006 and 2011. Given that war should cause investors to flee, what explains
this inverse phenomenon?

Would poor institutions be attractive?

Aleksynska and Havrylchyk (2012) argue that foreign investors are discouraged by
poor quality institutions, but sometimes their fears are shattered by the abundance
of natural resources. Indeed, all these countries have abundant natural resources.
Several reasons can then justify the attractiveness of these economies.
Almost invariably, the assaults of rebel groups, formed under the guise of a
liberation movement, have primarily targeted areas rich in natural resources. This is
the case with oil control (in Angola, Congo, Central African Republic (CAR), Uganda,
Sudan, Niger Delta in Nigeria and Chad); diamond mining (in Angola, Guinea, Liberia,
northern Côte d’Ivoire, DRC and Sierra Leone); and the control of cobalt, gold and tin
in Kivu, Uranium in Niger, forest resources or land (Burundi, Côte d’Ivoire, Darfur and
Rwanda). In fact, rebel control of areas endowed with natural resources is strategic
because it allows them to buy weapons, finance their actions and recruit militia
(Bannon and Collier, 2003; Orruj et al., 2007; Lansana and Gberie, 2007). Thus, foreign
companies already in place have often paid royalties to the rebels to continue their
operations. This is the case with logging in CAR, in the area controlled by the anti-
balaka2. More generally, in order to obtain financing, the rebels enter into resource
contracts with traders and foreign firms, which can then return to Western markets
via mafia networks through some relatively more stable neighbouring countries.
This was the case in Angola with diamonds mined and evacuated by Zambia and
South Africa, and in the DRC with cobalt routed through Rwanda. However, conflict
financing has often forced governments to set a special tax, but often they enter
into operating contracts with foreign firms for the few natural resources they still
control. Consequently, the governments must guarantee these firms protection that
would allow them to conduct the extraction; The Cosleg joint venture is an example.
Natural Resources, Quality of Institutions and Foreign Direct Investment in Sub-Saharan Africa 3

Given the ORYX Natural Resources diamond consortium, it is worth noting that often
foreign firms invest in an unstable environment, establish agreements with local or
international military companies and local elites (Bayart et al., 1997; Hugon, 2009).
Having become dependent on income from natural resource extraction, political elites
have no incentive to initiate effective institutional reforms. On the contrary, they are
accomplices to lack of transparency and corruption, which is all in favour of foreign
firms. Indeed, taking advantage of this situation, several foreign firms require or pay
bribes to avoid paying taxes, to escape the environmental requirements related,
for example, to the treatment of extraction sites, some of which (copper) have a
real damaging effects on the health of the populations. In some countries, such as
Ghana, the management of mining contracts was formerly the responsibility of the
mines minister who, against bribes, could decide that the foreign firm should pay the
State only 4% or 5% of its exploitation. In 1961, faced with the urgent need to obtain
revenue, Niger accepted a deal to exploit its uranium at a price almost five times lower
(41 euros instead of 186 euros) than the market price. So, weak institutions allow
multinationals, among other things, to obtain contracts, avoid additional costs and
increase their profit margins.
Chinese companies specifically choose to invest in countries with a very high
political risk. The first reason explaining the propensity of Chinese firms to invest
in countries with weak institutions relies on the fact that such economies are little
coveted by Nordic firms since they are highly demanding in terms of the quality
institutions. Second, it appears that the objectives sought by firms differ according to
legal status (Buckley et al., 2007). Thus, public enterprises are not necessarily guided
by the pursuit of profit. Very often they are engaged in a conquest to obtain the energy
resources essential to the functioning of their economies. It is, therefore, unlikely that
public enterprises will be affected by the quality of institutions as would be a private
enterprise. The participation of public enterprises in international investment involves
a political economy dimension. Thus, Chinese extractive companies have a strong
propensity to invest in countries that have strong political ties with their country. In
several African countries, such as Tanzania, the Chinese government uses diplomatic
tools to negotiate oil and mining contracts for firms from China (Li et al., 2013).
Another reason that drives companies, especially from the South, to invest in
countries with worse institutions is linked to the lockdowns put in place by developed
countries to thwart the important strategic acquisition attempts initiated by firms
from developing countries or from countries in transition. In this way, these firms have
little choice but to invest in countries where weak institutions constitute a less rigid
constraint, in countries with similar institutions or simply in oil and mining activities
regardless of the type of institutions (Aleksynska and Havrylchyk, 2012). The action
taken by the Canadian Government in 2004, influenced by public opinion, to prevent
the firm “China Minmetals” from investing nearly USD 6.7 billion in the acquisition of
the Canadian mining company “Noranda” is an illustration of this.
Aleksynska and Havrylchyk, (2012) consider that without institutional reforms,
developing countries will always be attractive. But is it possible to increase the inflow
4 Research Paper 421

of FDI to countries with intense natural resources, simply by improving the quality
of their institutions? It seems that weak institutions have either no effect on FDI in
natural resources or a positive effect. Conversely, can one argue that the impact of the
quality of institutions would be identical on foreign firms interested in investments
on technology, intellectual property and services?
This study sought answers to these questions with a dual purpose, namely:
• To identify and analyse the link between the exploitation of natural resources
and the quality of institutions.
• To assess the effect of the quality of institutions on FDI inflows by sector.
Asiedu (2006) investigated whether natural resources and market size on the one
hand, and government policies and institutions on the other, were of equal importance
to foreign investors. She concludes that in Africa all these factors matter. Only, it does
not distinguish the type of foreign investors. In the Netherlands, Poelhekke and Van der
Ploeg (2010) analysed the composition of FDI and hypothesized a resource-FDI curse.
They showed that natural resources have a direct and negative effect on non-natural
resource FDI inflows. Asiedu and Lien (2011) argued that in developing countries,
democracy helps mitigate the curse while Asiedu (2013) disclosed that institutions
are the vehicle of the curse. Komlan (2013) concurred for SSA, but Komlan (2016) then
concluded that the effect of institutions is negative or pitiful depending on whether
the country has abundant natural resources or not.
This study corroborates the hypothesis of a curse conveyed by the quality of the
institutions. Only, unlike previous research, we only look at countries with intensive
resources and we assume that the negative effect of institutions is not exercised on all
FDI, but rather on that directed to non-natural resource sectors. Another contribution
of this study lies in the assessment of the quality of institutions directly linked to
natural resources, by adopting two variables measuring transparency as institutional
variables. These are dummy variables that capture countries' commitment to the
Extractive Industries Transparency Initiative (EITI) and countries’ compliance with
transparency requirements.
The rest of this report is organized in five sections. The second section is devoted
to the review of the literature, the third to the methodological framework of the
study and the fourth section presents the results obtained and the discussion. The
last section is the conclusion.
2. Review of the literature
Several studies on Africa argue that natural resources are a curse (Auty, 1988; Sachs
and Warner, 1995). One of the reasons for this is the “bureaucratic-over-stretch”
syndrome highlighted by Ross (2012) to describe the tendency of politicians to use
annuities for personal prestige and for acts of corruption. For example, Ross (2012)
concluded that the quality of bureaucracy is bad in oil-rich countries.
These acts of corruption contribute to the formation of what Omeje (2006) describes
as “an alliance of forces of the dominant social classes”, comprising, among others,
of politicians, retired soldiers, technocrats and international investors (Ross, 2001),
who see their taxes reduced or cancelled (Sala-i-Martin and Subramanian, 2003). They
thus form allies to stifle any claims of the population (Ross, 2001). The concentration
of capital ownership in the hands of the elite reproduces social inequalities between
these elites and the rest of the population (Obi, 2007; Chindo et al., 2014; Kim and
Lin, 2017; Ebeke and Etoundi, 2017). Inequalities are aggravated by the absence
of legislative provisions requiring extractive companies to conclude community
development agreements with local populations, so that they can benefit from the
income generated by the exploitation of their land. Worse still, local populations are
often expropriated without compensation and the income generated by the resources
of their basements is used to develop other regions (Watts, 2008; Orogun, 2010).
Desperate and seeking means of subsistence by trying to extract low-grade minerals
from abandoned and untreated extraction sites, local populations are also exposed
to contamination (Ebeku, 2006). This means that property rights and fair justice are
not guaranteed and foreign firms seize the opportunity resulting from corruption,
poorly developed regulations or better still, regulations which suffer from laxity in
its application to comfort their position.
These inequalities drive agitations to achieve equitable sharing of resources
(Chindo et al., 2014). Similarly, the concentration of power in the hands of a
minority serves as a pretext for the opposition to attempt to acquire power by extra-
constitutional means; this is one of the main sources of military coups (Chindo et al.,
2014) and also leads to political instability (Jensen and Watchenko, 2004). Of course,
conflicts cause enormous losses in human capital and in infrastructure (Wanyande,
1997), and lead to massive and, unfortunately, unproductive investments in military
equipment, rather than in financing development (Ikejiaku, 2009). This is without
counting the effects on the investment.

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6 Research Paper 421

One of the first studies to analyse the effect of institutional quality on FDI flows
was that of Schneider and Frey (1985). Similar to Kaufman et al. (1999) and Chan
and Gemayel (2004), they showed that political instability has a negative effect on
inward FDI. For Hellman et al. (2002), corruption is a factor that reduces FDI inflows
into a country. Djankov et al. (2008) argued that investors' protection is a fundamental
factor in a country’s attractiveness. Gradeva (2010), Gwenhamo (2009), Stein and
Daude (2007) and Du et al. (2007) claimed that the quality of institutions plays a
fundamental role in determining the location of multinational firms abroad, both as
pull factors and as push factors. Asiedu (2005) also contended that corruption and
political instability have a negative effect on FDI in Africa. They also showed that if
Nigeria’s level of corruption became similar to that of South Africa, the effect would
be an increase in FDI and an increase in the share of exports of fuels and minerals in
total exports of 34.84%.
Following Asiedu (2003, 2005), Komlan (2006) showed that the quality of
institutions, as measured by the International Country Risk Guide (ICRG), has had
a significant impact on FDI inflows in SSA. The conclusions of Naudé and Krugell
(2007), Djaowe (2009), Benáček et al. (2012), Yosra et al. (2013) and Julio et al. (2013)
are consistent with this finding.
These latest studies did not consider the place of natural resources. However,
Gylfason and Zoega (2002), Sala-I-Martin and Subramanian (2003), Hodler (2006)
and Ako and Uddin (2011), showed that natural resources have a perverse effect on
economic factors through their effects on the quality of institutions.
In 2010, Poelhekke and Van der Ploeg (2010) noted that the analysis of the effects
of natural resources on the composition and volumes of FDI seems not to have been
taken into account in the available studies. They are also the first to approach the
analysis of the existence of a resource-FDI curse. From data collected on multinational
firms in the Netherlands between 1984 and 2002, Poelhekke and Van der Ploeg (2010)
showed that: a) natural resources attract FDI specific to the natural resources sector;
and (b) natural resources push back FDI directed to non-resource sectors and this
effect is dominant. For example, they showed that if the price of a barrel of oil doubles,
it would result in a reduction of inward FDI in non-natural resource sectors by 10%.
Thus, globally, FDI inflows are smaller in resource-rich countries. The total effect of
natural resources on FDI is negative, especially for countries that are geographically
distant from major markets.
This work by Poelhekke and Van der Ploeg (2010) had the merit of analysing the
existence of a resource-FDI curse, but the quality of institutions was absent in this
relationship. Moreover, Poelhekke and Van der Ploeg (2010) assume that the effect of
natural resources on FDI is not direct. They also consider that the quality of institutions
is the vector transmitting the resource curse to FDI.
Asiedu and Lien (2011) and Asiedu (2013) examined the interaction between
natural resources, the quality of institutions and FDI. However, like Poelhekke and
Van der Ploeg (2010), they believe that crowding out effect of natural resources on
FDI is straightforward. They, therefore, tried to determine whether the quality of
Natural Resources, Quality of Institutions and Foreign Direct Investment in Sub-Saharan Africa 7

institutions can mitigate this effect. Moreover, Asiedu and Lien (2011) used only one
variable of the quality of institutions, namely democracy. Asiedu (2013) considered
more institutional variables, including: the effectiveness of the law, the respect of
contracts and corruption. Assuming that the quality of institutions mitigates the
perverse effect of natural resources on FDI suggests that the quality of institutions
is autonomous. Such consideration cannot be made without foundation. For this
reason, this study first examined the relationship between the exploitation of natural
resources and the quality of institutions.
Komlan (2013) showed that in SSA, the abundance of natural resources degrades
the quality of institutions and thus reduces its ability to attract foreign investors.
Komlan (2016) added that in resource-rich countries, the quality of institutions has a
negative effect on FDI. However, its effect is positive in the poorly endowed countries.
The studies carried out by Asiedu and Lien (2011), Asiedu (2013) and Komlan (2013,
2016) used aggregated values of FDI flows. In contrast to this work, disaggregated data
on FDI flows from the Central African States Bank (BEAC) are used here. In addition,
these authors worked on macro-panels but with estimation techniques adapted
to micro-panels, which do not take into account stationarity, co-integration and
heterogeneity. There is therefore a risk of fallacious regression. This paper focuses
on the analysis of co-integration.
This work is therefore distinguished by a prior analysis of the relationship between
dependence on natural resources and the quality of institutions. In addition, it
attempts from the data on FDI flows by sector to assess the effect of the quality of
institutions. Moreover, using the Dumitrescu and Hurlin (2012) test and panel co-
integration methods, this work attempts to grasp the dynamic relationships that are
established between variables, possibly non-stationary, retained in the long term.
3. Methodology
3.1. Data and variables of the study

The study covers five SSA countries3 over the period 1996 to 2015. This sample and
the period were selected based on the availability of data on FDI flows to extractive
activities. The unavailability of these data in most countries significantly reduced
the temporal and spatial dimension of the study. In the end, the selected sample
comprised five of the eight SSA countries that the International Monetary Fund (IMF)
considers as oil exporters. With the exception of Cameroon, these economies are all
dependent on their oil exports.

3.1.1. Natural resources

The natural resources variable, denoted NRdep, is measured by the share of exports
of fuels, ores and metals in the total exports of the host country. This variable makes
it possible to assess the country’s dependence on natural resources. This is because
we know that in general, fuels, ores and metals are exploited and managed by the
State. So the State’s room for manoeuvre in economic policy depends on these flows
of income. This variable also measures the level of diversification of the economy.
Thus, if its value is high, this indicates that the host economy is not very diversified.
On the one hand, the study assumes that dependence on natural resources should
determine the quality of institutions. On the other hand, dependence on natural
resources should directly and positively impact FDI inflows. This is because of the
activities that are emerging around the exploitation of natural resources, in industry
and services.

3.1.2. The quality of institutions

The definition of institutions that fits this study is that of North (1990). For him,
institutions are the “rules of the game”; that is to say, “the constraints established by
men, which structure human interactions”. This definition puts man at the forefront of
building institutions. These institutions resulting exclusively from the action of man
are considered as constraints imposed on human action, and their implications must
be apprehended in terms of incentives for human action. Institutions, from this point

8
Natural Resources, Quality of Institutions and Foreign Direct Investment in Sub-Saharan Africa 9

of view, comprise formal constraints, informal constraints and the modalities of their
application. Acemoglu and Johnson (2005) agree with North (1990), saying that “good
institutions” are those that protect property rights, which limit the power of elites and
all those who own the power, and that guarantee the protection of property rights and
equality of opportunity between men. The institutional variables allow researchers
to assess the incentive framework of the investment, thus the constraints related to
the legal and socio-political environment which affect the choices of the investors.
Several measures of quality of the institutions were selected to better capture the
possible impact of regulatory framework on investment decisions. Also, to capture
the effect of the regulation of natural resource exploitation sector, two indicators of
measurement of transparency in the management of extractive resources, in dummy
variable form, were constructed. All the two indicators refer to EITI. This initiative,
which currently has 31 member countries, including 24 SSA countries, requires
transparent communication from its members on extractive contracts, extractive
resource revenues and uses that are facts of said income. In addition, national reports
must be developed in a committee in which must include civil society.
The first of these variables marked “Eitim” takes the value “0” for the years before
the country’s accession to EITI, and the value “1” for years thereafter. This variable
should capture the reaction of foreign investors to the decision of countries to be
transparent in awarding contracts and managing the resulting resources.
Often because of conflict, some countries have been excluded from the list of
member countries. This is the case of CAR. Others, however, had their efforts of
transparency recognized by their passage at the stage of “compliant country”. A
second transparency variable is constructed with the value “0” for the years of non-
compliance and the value “1” for the years of compliance. This variable is used to
assess the effect of advances in transparency by countries endowed with natural
resources on the investment choices of foreign firms.
In addition, a synthetic indicator is also used to capture the overall effect of political
institutions and economic institutions. This “INST” indicator is constructed using a
weighted arithmetic average of the six indicators that make up the basis of the World
Wide Governance Indicator data sets (World Bank, 2017). The weights were obtained
using a principal component analysis and are presented in Table 1.

Table 1: Weight of the components of the institutional quality index

Components Voice and Political Rule of law Control of Regulatory Government
accountability stability corruption quality effectiveness
Eignvalue 4.36077 0.975336 0.352293 0.171335 0.0817426 0.058527
Proportion 0.7268 0.1626 0.0587 0.0286 0.0136 0.0098

Then, to capture the individual effects, the institution variable was replaced in
turn by each variable that composes it. These are six separate governance indicators
with values between −2.5 and +2.5:
• The control of corruption (CCor), which measures the use of power prerogatives
for personal ends. A high value characterizes a low level of corruption.
10 Research Paper 421

• Political stability and the absence of violence (Pstab), which represent the
likelihood of violent changes of regime or government, as well as serious
threats to public order, including terrorism. A high value indicates an enabling
environment for long-term investments, thus a good predictability of returns
on investments.
• Accountability (Actby) or impunity, which apprehends the possibility for the
citizens of a country to take part in the choices of the rulers, and measures
the freedom of expression, association and the press. A high value indicates
a lack of impunity.
• The effectiveness of bureaucracy (Bur), measuring the quality of the public
service, the quality of the bureaucracy, the competence of the civil servants,
the presence of political pressure in the public service and the credibility of the
government in respect of its commitments to political and economic actors.
A high value corresponds to efficient institutions, and therefore to a strong
attractiveness of foreign investors.
• Regulatory quality (Reg), which measures regulatory impediments to the
functioning of markets. A high value refers to a framework conducive to the
development of private activity.
• The state of the law (Rlaw), which perceives the confidence that the agents
concede to the rules which govern their company, in particular the respect of
the contracts, the rights of property, the policies of justice and the probability
of being a victim of violence or crime. A high value assumes a low risk.

3.1.3. Other variables

Data FDI to extractive activities (Fdiex) or non-extractive activities (Fdinex), gross

domestic product (GDP), per capita growth rate (Gdprh), real exchange rate (Rexch),
degree of openness (Opens), domestic investment (Invest), inflation rate (Infl) and
resource dependency (NRdep) come from the World Investment Report database
(UNCTD, 2017). Data on human capital (HUM), infrastructure (Infr: percentage of the
population with access to electrical energy), level of financial development (Fdvp:
credit to the private sector) and quality of institutions are derived from the basics data
from the World Development Indicators (World Bank, 2017a) and WGI dataset (World
Bank, 2017b). The data on direct investments in extractive activities are extracted
from the national accounts published by the Central Bank (BEAC, 2017). FDI flows
to non-extractive activities are therefore the result of the difference between inward
and outward flows.
These data are processed to correct the presence of zero flows. To avoid the effects
of magnitudes and to be able to interpret the coefficients of the estimate as elasticities,
all the data are used in logarithmic value. Referring to the works of Busse and Hefeker
(2007) and Chua et al. (2012), the logarithmic transformation of the negative values
was made according to the following formula:
Natural Resources, Quality of Institutions and Foreign Direct Investment in Sub-Saharan Africa 11

3.2. Specification of the models

3.2.1. Causal relationship between endowment of natural
resources and the quality of institutions

The link between the quality of institutions and the degree of dependence on natural
resources was analysed using the non-causality test in the sense of Granger on
heterogeneous panel, proposed by Dumitrescu and Hurlin (2012). Compared to the
Granger causality test commonly used in panel data, the test proposed by Dumitrescu
and Hurlin (2012) takes into account the heterogeneity of the panel and is relatively
simple to implement. The basic model assumes two stationary variables x and y,
observed on N individuals during T periods, such that for each individual (i) and at
each period (t), we have:
(1)
αi represents the individual effects, considered as fixed. But generally, it is
not possible to grasp all the heterogeneity of the dynamic link that is established
between two variables. Thus, parameters γik and βik are assumed to be fixed and
different from one individual to another (Dumitrescu and Hurlin, 2012). In most cases,
panel homogeneity tests lead to the conclusion that the panel is heterogeneous.
As such, if the parameters are abusively imposed as homogeneous, the relevance
of the results becomes questionable (Hurlin, 2005). However, the order of lags K is
assumed to be identical for all the countries of the panel. Indeed, if in the panel one
assumes a lag specific to each country, the determination of the delay rests then
only on the temporal information. It runs the risk of providing very limited results.
Thus, admitting a common lag order has the advantage of facilitating the obtention
of asymptotic distributions of the statistics intended for the analysis of the causal
relation (Dumitrescu and Hurlin, 2012).
For this study, each indicator of the quality of institutions gave rise to a model to
be estimated. The variable “INST” was successively replaced by each of the indicators
of the quality of the institutions. The following general model had to be tested:

(2)

3.2.2. Impact of natural resources and institutional quality on FDI

inflows

Following in the footsteps of Driffield (2002), taken up by Naudé and Krugell (2007),
we assume that the entry of a multinational firm or the reinvestment of its profits
in one of the SSA countries is attributable to the profits expected. The probability
of a firm obtaining such gains can be estimated by assuming that it operates in a
finite time universe with a known market interest rate. In reality, this probability is
not observable, but it can be approximated by admitting that it is a function of the
12 Research Paper 421

characteristics of the host economy. The variables that determine these characteristics
are therefore strongly correlated with the profits expected by the foreign firm; either
in terms of increased turnover or in terms of cost reduction. These include: degree of
openness, market size (GDP per capita growth rate), level of inflation, infrastructure,
human capital, exchange rate, labour endowment, natural resources and the quality
of institutions. However, it would be difficult to use all these variables in the practical
analysis because of the risk of multicollinearity that may arise from the links that
certain variables maintain. We must make a choice. That said, the basic model to be
estimated can be formulated as an autoregressive time-lagged equation (ARDL (p,
q1, q2, ..., qk)), formulated by Pesaran et al. (1999). Let the following general form be:

(3)

Where Xit is the vector of the explanatory variables μi designates the fixed effects.
The group number is i = 1, 2, 3 ... N; the number of period is t = 1, 2, 3, ... T. λit is a scalar
and δit is the vector of the coefficients. If it turns out that the variables of Equation 3
are stationary of order I(1) and co-integrated, then the error term εit is stationary of
order I(0) for all the individuals of the panel. The main interest in having co-integrated
variables lies in their ability to react to any deviation from the long-term equilibrium. It
is therefore possible to rewrite Equation 3 in the form of an error-correction equation,
in which the short-run dynamics of the variables is influenced by the deviation from
the long-run equilibrium. So, we have the following equation:

(4)

Where Φi is the adjustment coefficient (assumed to be negative), θi is the vector
of the long-term coefficients, and Δ is the variation between two given dates.
With this ARDL formulation, it will be possible to jointly estimate the short and
long-term parameters. Moreover, there will be no difficulty in taking into account both
stationary I(0) and I(1) or cointegrate variables (Pesaran and Shin, 1999). In passing,
note that, the values of p and qi, which indicate the number of lags to be taken in the
equation is determined by the Schawrtz Information Criterion (SIC).

(5)

The long-run equation to be estimated is presented in the following form:

Where: is the error term.

Natural Resources, Quality of Institutions and Foreign Direct Investment in Sub-Saharan Africa 13

3.3. Estimation methods

3.3.1. Preliminary tests

Before any estimation on panel data it is necessary to check the stationarity of the
variables. Indeed, it is now proven that it is possible to have fallacious regressions
on panel data. In many studies, the choice of the unit root test is almost random. The
approach adopted here consists of determining the stationarity test adapted from the
study of homogeneity and the cross-dependence test.

3.3.1.1. The Poolability test

This homogeneity test is performed by interpreting the Fisher statistic, obtained from
the estimation of the Equation 5 by fixed effects. Table 2 shows that the p-values
associated with Fisher’s statistics are below the 5% threshold. Hence, the assumption
of perfect homogeneity of the different models cannot be retained.

Table 2: Homogeneity tests

(1) (2) (3) (4) (5) (6) (7) (8) (9)
Inst Eitim Eitic Pstab Actby Ccor Reg Bur Rlaw
FDIex
F-Statistic 9.82*** 5.86*** 6.80*** 8.46*** 9.43*** 8.36*** 10.10*** 7.95*** 9.41***
(0.0000) (0.0003) (0.0001) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
FDInex
F-Statistic 6.56*** 3.88*** 5.05*** 5.02*** 5.14*** 7.30*** 6.62*** 6.03*** 6.12***
(0.0001) (0.0060) (0.0010) (0.0011) (0.0009) (0.0000) (0.0001) (0.0002) (0.0002)
p-values in parentheses. ***p < 0.01.
For the rest, we assume that the heterogeneity of the models comes from the
constant.

3.3.1.2. Cross-dependence test

To test the cross-dependence of each variable, the Pesaran test (2004) was used.
Table 3 presents the results obtained for each case. The null hypothesis (H0) is
that there is independence in cross section. The Pesaran CD-statistic is based on
the average correlation coefficients between different countries taken two-by-two
for each period of time. Under the null hypothesis, this statistic is asymptotically
distributed according to a standard normal N (0, 1).
These results show strong evidence of transversal dependence for the variables
NRdep, Actby, Bur, Hum, Rexch, Infl, Infr and Fdvp.
14 Research Paper 421

Table 3: Pesaran test CD

Variables Fdiex Fdinex NRdep Inst Actby Pstab Ccor Reg Rlaw
CD-test -1.20 -1.62 5.97*** -0.35 3.30*** -0.35 -1.10 0.45 -1.10
(0.229) (0.106) (0.000) (0.728) (0.001) (0.725) (0.269) (0.651) (0.270)

Variables Bur Hum Opens Gdprh Rexch Invest Infl Infr Fdvp
CD-test 3.24*** 13.06*** 1.87* -0.59 11.63*** 0.78 13.64*** 13.94*** 8.95***
(0.001) (0.000) (0.062) (0.557) (0.000) (0.435) (0.000) (0.000) (0.000)
p-values in parentheses. ***p < 0.01, *p < 0.1.

Therefore, the behaviours of each of these variables among the countries studied
are influenced by each other. However, the attractiveness of FDI in each country
responds to the internal specificities of the economy.
The correct unit root test can now be determined.

3.3.1.3. Unit root tests

The results of the Pesaran stationarity test (2007) are shown in Table 4.

Table 4: Pesaran unit root test (2007) or Pesaran CIPS test

At level In first difference
Variables Z[t-bar] P-value Variables Z[t-bar] P-value
NRdep 1.013 0.844 ∆NRdep -1.445* 0.074
Actby 0.006 0.502 ∆Actby -4.029*** 0.000
Bur -1.759 0.039 ∆Bur -4.831*** 0.000
Rexch 0.564 0.714 ∆Rexch -5.434*** 0.000
Hum 1.916 0.972 ∆Hum -1.647* 0.050
Infl -1.118 0.132 ∆Infl -1.845** 0.033
Infr -0.269 0.394 ∆Infr -5.881*** 0.000
Fdvp -2.135** 0.016 ∆Fdvp -2.377*** 0.009
***p < 0.01, **p < 0.05, *p < 0.1.

This test is used to test the presence of unit root in a heterogeneous panel when
there is evidence of transverse dependence. It appears that at level, almost none of the
variables are stationary. However, when they go into difference, they all become one.
The test of Maddala and Wu (1999) is more adapted in cases of transversal
independence. The results of this test are shown in Table 5.

Table 5: Unit root test of Maddala and Wu (1999) [with specification without trend]
At level In first difference
Lags 0 1 2 3 0 1 2 3
Fdiex 8.495 9.071 8.720 19.169 101.14*** 54.407*** 28.873*** 24.117***
(0.581) (0.525) (0.559) (0.038) (0.000) (0.000) (0.001) (0.007)
Fdinex 35.375 14.946 27.328 5.775 219.564*** 82.582*** 58.376*** 31.926***
(0.000) (0.134) (0.002) (0.834) (0.000) (0.000) (0.000) (0.000)

14
Natural Resources, Quality of Institutions and Foreign Direct Investment in Sub-Saharan Africa 15

Inst 6.209 14.039 10.669 9.090 57.408*** 52.466*** 16.562* 23.961***

(0.797) (0.171) (0.384) (0.524) (0.000) (0.000) (0.085) (0.008)
Pstab 11.047 8.248 4.177 4.629 79.381*** 54.622*** 14.327 13.694
(0.354) (0.605) (0.939) (0.915) (0.000) (0.000) (0.159) (0.187)
Ccor 17.486 15.701 14.431 16.656 61.713*** 46.757*** 19.987** 17.799*
(0.064) (0.109) (0.154) (0.082) (0.000) (0.000) (0.029) (0.058)
Reg 15.175 10.495 8.801 8.305 125.105*** 50.503*** 34.023*** 32.952***
(0.126) (0.398) (0.551) (0.599) (0.000) (0.000) (0.000) (0.000)
Rlaw 13.495 10.560 8.711 11.183 65.663*** 69.223*** 35.075*** 22.754**
(0.197) (0.393) (0.560) (0.343) (0.000) (0.000) (0.000) (0.012)
Opens 23.280 12.897 27.438 6.560 103.464*** 70.511*** 23.263** 12.482
(0.010) (0.229) (0.002) (0.766) (0.000) (0.000) (0.010) (0.254)
Gdprh 50.225 26.302 17.958 12.218 162.577*** 102.913*** 90.056*** 27.611***
(0.000) (0.003) (0.056) (0.271) (0.000) (0.000) (0.000) (0.002)
Invest 10.890 14.415 11.576 11.997 111.679*** 70.327*** 20.722** 16.055*
(0.366) (0.155) (0.314) (0.285) (0.000) (0.000) (0.023) (0.098)
p-values in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1.

The observation is the same: at this level, it is difficult to conclude that the variables
are stationary, but as first difference, all the variables become stationary. The next step
is to verify the existence or not of a long-term relationship between model variables.

3.3.1.4. Co-integration test

The co-integration test chosen is that of Pedroni. Pedroni (1999, 2004) proposes several
tests to verify the null hypothesis H0 of non-integration for all the observations by
allowing the heterogeneity of the parameters for each one of these.
This test is performed on Equation 5, first, by replacing the dependent variable with
extractive FDI flows and then, with non-extractive FDI inflows. In each case, care was
taken to also replace the institutions variable by each of the indicators selected for
its measurement. This is to ensure that there is a long-run relationship in each case.

Table 6a: Co-integration test on the relationship with extractive FDI

(1) (2) (3) (4) (5) (6) (7) (8) (9)
Inst Eitim Eitic Pstab Actby Ccor Reg Bur Rlaw
Panel v 0.31 0.05 -0.84 0.89 -0.69 1.29 -0.85 -0.95 -0.22
(0.3764) (0.4796) (0.7997) (0.1866) (0.7565) (0.0989) (0.8037) (0.8298) (0.5893)
Panel rho 1.08 0.85 0.66 1.19 1.13 0.93 1.15 1.14 0.92
(0.8602) (0.8037) (0.7463) (0.8829) (0.8719) (0.8250) (0.8761) (0.8732) (0.8204)
Panel PP -4.77*** -3.41*** -3.60*** -5.13*** -5.52*** -5.72*** -6.54*** -5.41*** -5.99***
(0.0000) (0.0003) (0.0002) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Panel ADF -4.11*** -3.75*** -3.37*** -4.39*** -4.44*** -3.60*** -5.05*** -4.38*** -3.54***
(0.0000) (0.0001) (0.0004) (0.0000) (0.0000) (0.0002) (0.0000) (0.000) (0.0002)
Group rho 2.10 1.86 1.44 2.44 2.10 2.00 2.18 2.13 1.92
(0.9823) (0.9686) (0.9248) (0.9927) (0.9822) (0.9772) (0.9856) (0.9835) (0.9729)
Group PP -3.80*** -3.12*** -3.25*** -5.11*** -4.38*** -4.45*** -5.45*** -4.29*** -4.82***
16 Research Paper 421

(0.0001) (0.0009) (0.0006) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

G r o u p -3.36*** -2.93*** -3.05*** -2.96*** -3.28*** -3.19*** -4.08*** -3.13*** -3.03***
ADF
(0.0004) (0.0017) (0.0011) (0.0015) (0.0005) (0.0007) (0.0000) (0.0009) (0.0012)
p-values in parentheses. ***p < 0.01.

Table 6b: Co-integration test on the relationship with non-extractive FDI

(1) (2) (3) (4) (5) (6) (7) (8) (9)
Inst Eitim Eitic Pstab Actby Ccor Reg Bur Rlaw
Panel v -1.01 -0.63 -1.1591 -1.49 -2.18 -2.12 -1.75 -2.09 -1.98
(0.8449) (0.7349) (0.8768) (0.93) (0.9854) (0.9832) (0.9598) (0.9816) (0.9764)
Panel rho 1.87 0.56 0.6987 2.26 1.97 1.65 2.02 2.29 1.52
(0.9696) (0.7117) (0.7576) (0.9881) (0.9758) (0.9510) (0.9783) (0.9889) (0.9355)
Panel PP -6.10*** -7.36*** -8.40*** -4.75*** -5.64*** -6.76*** -4.72*** -4.99*** -5.71***
(0.0000) (0.0000) (0.0000) (0.0000) (0.000) (0.0000) (0.0000) (0.000) (0.0000)
Panel ADF -5.17*** -4.57*** -4.89*** -3.40*** -4.55*** -4.33*** -3.17*** -3.91*** -5.65***
(0.0000) (0.0000) (0.0000) (0.0003) (0.000) (0.0000) (0.0008) (0.0000) (0.0000)
Group rho 2.01 0.99 0.97 2.36 2.18 2.14 2.03 2.34 1.86
(0.9779) (0.8394) (0.8339) (0.9909) (0.9853) (0.9840) (0.9789) (0.9904) (0.9684)
Group PP -6.53*** -11.41*** -10.80*** -7.03*** -6.66*** -7.44*** -7.29*** -6.44*** -6.13***
(0.0000) (0.0000) (0.000) (0.0000) (0.000) (0.0000) (0.0000) (0.0000) (0.0000)
Group ADF -5.08*** -5.20*** -6.40*** -3.66*** -4.80*** -4.22*** -3.55*** -4.43*** -5.03***
(0.0000) (0.0000) (0.0000) (0.0001) (0.000) (0.0000) (0.0002) (0.0000) (0.0000)
p-values in parentheses. ***p < 0.01.

The results reveal that four out of seven statistics are significant at the 1% level.
It is therefore easy to conclude that the null hypothesis of non-co-integration cannot
be accepted.
Thus, the estimation of the effects of the quality of institutions and natural
resources can be made using the Pool Mean Group (PMG) method. As for the test of
causality envisaged, it requires only the stationarity of the variables, moreover proved.

3.3.2. Estimation of the causal relationship

This estimate requires the determination of the number of delays by the Schawrtz
Bayesian Information Criterion (SBIC). Then, it becomes easy to carry out the causality
test of Dumitrescu and Hurlin (2012). It is only necessary to read the calculated P-values
and to compare them to the threshold of 5%. Thus, any P-value below this threshold
reflects the existence of a causal relationship for at least one country in the sample.

3.3.3. Estimation of FDI determinants

The effects of institutional quality on FDI flows are estimated by the aggregated
average grouped method, or PMG, proposed by Pesaran et al. (1999). In other words,
it is assumed that in the short term, the effects specific to individuals are so important
Natural Resources, Quality of Institutions and Foreign Direct Investment in Sub-Saharan Africa 17

that each of them must be represented by a single equation, but that in the long run,
individuals’ behaviours converge, and can be represented by identical coefficients.
The PMG estimator has the advantage of having good properties even when the size
N of the sample is small relative to the time dimension (Pesaran et al., 1997, 1999;
Hsiao et al., 1999; Blackburne and Frank, 2007). It provides unbiased and convergent
results even with evidence of endogeneity, and takes into account panel heterogeneity
in estimating the long-term dynamic relationship (Pesaran et al., 1999). In addition,
it makes it possible to simultaneously estimate the short and long-term relationship
as well as the temporal adjustment between the two periods.
4. Results and discussions
4.1. Results of the causality test

The question here is whether dependence on natural resources determines the quality
of institutions in the countries studied. The results obtained are shown in Table 7.
These results show that dependence on natural resources does not determine the
quality of institutions in the oil exporting countries studied. This result is contrary to
that of Ross (2001, 2012) who argues that the abundance of natural resources makes
institutions indeterminate and that in particular, it causes the inefficiency of the
bureaucracy. To say that the quality of institutions does not derive from dependence
on natural resources certainly does not mean that this dependence has no effect on
it. Moreover, this result suggests that the quality of the institutions has its origins
elsewhere. Perhaps as postulated by Acemoglu et al. (2001) and Acemoglu and
Robinson (2012), it could be the colonial system.

Table 7: Dumitrescu and Hurlin (2012) homogeneous causality test results

Relationship Lags Statistics P-values
Inst does not homogeneously cause nrdep 1 2.8619** 0.0334
Nrdep does not homogeneously cause inst 1 0.9918 0.8517
Pstab does not homogeneously cause nrdep 2 2.9091 0.6676
Nrdep does not homogeneously cause inst 2 2.6687 0.8102
Actby does not homogeneously cause nrdep 1 1.6274 0.5488
Nrdep does not homogeneously cause actby 1 0.6665 0.5555
Ccor does not homogeneously cause nrdep 1 1.8309 0.3946
Nrdep does not homogeneously cause ccor 1 0.8812 0.7461
Bur does not homogeneously cause nrdep 1 0.9321 0.7942
Nrdep does not homogeneously cause bur 1 0.5193 0.4403
Reg does not homogeneously cause nrdep 2 1.0518 0.3018
Nrdep does not homogeneously cause reg 2 2.8941 0.6763
Rlaw does not homogeneously cause nrdep 1 1.0359 0.8947
Nrdep does not homogeneously cause rlaw 1 0.6230 0.5200
**p < 0.05
However, the quality of institutions causes dependence on natural resources,
and this link is significant at the 5% level. This indicates that the weakness of local
institutions poses obstacles to the development of non-extractive activities, leading
to low diversification of the economies concerned. Indeed, the economies of Chad,
Gabon, Congo and Equatorial Guinea are so dependent on oil revenues that a sharp
18
Natural Resources, Quality of Institutions and Foreign Direct Investment in Sub-Saharan Africa 19

drop in the price of a barrel of oil in the short term causes a slowdown in the economic
activity of these countries, making it difficult for the State to meet its commitments. In
recent years the effects have been observed on the ability of these countries to meet
their domestic commitments, particularly in terms of salary payments. In reality, the
development of processing activities in Gabon is only very recent. The effect is less
important in Cameroon which is a slightly more diversified economy. But the fact
remains that because of corruption, several domestic companies operating in various
fields (textile, cigarette, battery and agro-food,) have seen their market share sharply
reduced in favour of imports that cross borders by paying bribes.
Similarly, with the large size of the informal sector, it is possible to conclude that the
regulatory framework is rigid, in this case a high tax burden. In addition, the recurrence
of socio-political turmoil in the area tends to make returns on investments uncertain.
It must be said that the rise of terrorism in the region does not make the context better.
Moreover, this dependence on oil revenues is itself a source of uncertainty because
of the risks of economic instability, particularly due to shocks on commodity prices.

4.2. Sectoral analysis of the effects of institutional

quality on FDI flows

Table 8 presents the results of the estimates of the effect of institutional quality on
inflows of FDI into the extractive sector. This is actually the estimation of Equation 5
where the institution variable has, in turn, been replaced by each of its components.
This made it possible to avoid a possible multicollinearity bias, due to the strong link
that exists between indicators of the quality of institutions.
It shows that natural resources have a positive and significant effect on extractive
FDI flows. This result is in line with the findings of Asiedu (2005), Ajayi (2006), Anyanwu
(2002), Komlan (2016) who showed that natural resources are the main factor of
attractiveness of SSA economies. Extractive FDI is therefore oriented towards rent-
seeking.
Institutional quality, taken as a whole, does not have a significant effect on
extractive FDI flows. It goes without saying that the expected benefits of extraction
make foreign firms interested in this sector insensitive to political and economic risks.
However, when we analyse the effect of the composite variables, we realize that the
effect is mixed.
Accession to EITI did not have a significant impact on the decisions of foreign
firms to invest in the extractive sector. However, countries’ compliance with a level of
transparency has had a negative effect on FDI flows in the extractive sector. This seems
to support the argument that foreign firms like a poor institutional environment where,
for example, it is possible to obtain bribes and escape environmental constraints by
the same means.
We also note that political stability has a positive and significant effect at 5% on
extractive FDI flows. Knowing the regularity with which socio-political troubles have
20 Research Paper 421

been observed in the region (including the Bakassi conflict, the food riots, the fight
against Boko Haram and the Anglophone problem in Cameroon; conflicts in Chad and
CAR; the post-election crisis in Gabon; and failed coups d’état in Equatorial Guinea),
political instability appears to create a beneficial context for foreign firms interested
in investing in the extractive sector (Hugon, 2009). Indeed, in this context, it is easy to
obtain less binding contracts both from the government, which needs the means to
maintain the heavy incompressible loads of the army, than from the rebels who very
often control and who need the means to finance their insurrection.
Table 8: Effect of institutional quality on extractive FDI
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Variables Institutions Transparency Transparency Political Control of Voice and Regulatory Bureaucracy Role of
initiation compliance Stability Corruption Accountability Quality Law
NRdep 1.303** 1.162*** 1.506*** 1.214*** 0.975*** 1.281** 0.877*** 0.919* 0.970***
(0.637) (0.306) (0.232) (0.241) (0.270) (0.570) (0.193) (0.484) (0.366)
Hum 2.659*** 2.009*** 2.012*** 2.914*** 2.438*** 2.351*** 2.757*** 2.257*** 2.840***
(0.475) (0.411) (0.331) (0.298) (0.341) (0.365) (0.342) (0.530) (0.343)
Gdprh 0.233*** 0.169*** 0.0874** 0.138*** 0.133*** 0.152*** 0.185*** 0.158*** 0.156***
(0.0603) (0.0387) (0.0349) (0.0400) (0.0393) (0.0448) (0.0394) (0.0415) (0.0510)
Opens -7.473*** -7.413*** -9.269*** -7.121*** -7.242*** -9.616*** -6.727*** -7.127*** -6.998***
(1.913) (1.205) (0.986) (0.876) (1.074) (2.295) (0.827) (1.504) (1.664)
Rexch -5.426*** -1.310 -1.072 -2.146 -2.819** -3.947*** -3.750*** -2.320* -3.114**
(1.953) (1.297) (0.858) (1.366) (1.210) (1.445) (1.255) (1.317) (1.413)
Inst -0.593
(1.691)
Eitim 0.252
(0.238)
Eitic -0.973***
(0.273)
Pstab 1.089**
(0.432)
Ccor -2.054
(1.357)
Natural Resources, Quality of Institutions and Foreign Direct Investment in Sub-Saharan Africa

Actby -1.979**
(0.990)
Reg -1.414***
(0.543)
Bur -0.519
(0.846)
21
 22

Rlaw 0.260
(1.370)
Constant -7.303 -2.076 -0.884 -3.070 -4.043 -5.203 -6.519 -4.106 -5.748
(5.571) (2.106) (1.678) (3.265) (3.300) (3.697) (5.663) (3.436) (4.952)
p-values in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1.
Research Paper 421
Natural Resources, Quality of Institutions and Foreign Direct Investment in Sub-Saharan Africa 23

Corruption control has no significant effect on extractive FDI flows. So, it is easy to
assume that the mechanisms for controlling corruption are ineffective or at least that
foreign firms know how to act to divert the attention of the bodies concerned by the
control. Corruption, therefore, acts as a “helping hand”, that is, a greasing mechanism
for foreign extractive companies.
The effect of accountability is negative and significant. So, the less impunity and
laxity in the control of public affairs management, the more foreign investors in the
extractive sector want to change their environment. Similarly, they are negatively
affected by any form of regulation of extractive activity. This is because the quality of
regulation has a negative effect on FDI flows in this sector. However, foreign investors
in this sector are insensitive to administrative slowness and freedom of expression.
Overall, these findings are consistent with the findings of Buckley et al. (2007),
Aleksynska and Havrylchyk (2012) and Li et al. (2013) that show foreign investment
is possible despite the presence of weak institutions.
When one examines the effects of institutional quality on FDI inflows into the
non-extractive sector, the difference is quite significant. As can be seen in Table 9,
the quality of institutions has a negative and significant effect at the 1% level on FDI
inflows in the non-extractive sector. Thus, deterioration in the quality of institutions of
1% causes a decrease in FDI inflows of 4.8%. This is a more than proportional decline.
This result is consistent with those of Asiedu (2013) and Komlan (2013, 2016).
The transparency initiative did not really help to explain non-extractive FDI inflows.
Probably the effect of countries’ adherence to this initiative did not significantly
affect the quality of institutions. It is likely that over time this effect will become more
significant.
Political stability, which has a positive effect on extractive FDI flows, has the
opposite effect on non-extractive FDI. This means that for foreign investors concerned
with this sector, socio-political unrest makes future returns uncertain, and leads
them to arbitrate between several territories. They therefore prefer politically stable
economies.
In addition, the control of corruption has a positive effect on incoming foreign
investment in the non-extractive sector. Thus, the more efficient the control of
corruption, the more foreign firms can reduce their transaction costs.
 24

Table 9: Effect of institutional quality on non-extractive FDI flows

(1) (2) (3) (4) (5) (6) (7) (8) (9)
Variables Institutions Transparency Transparency Political Control of Accountability Regulatory Bureaucracy Role of
initiation compliance Stability Corruption Quality Law
NRdep -2.724*** -1.921*** -2.388*** -2.353*** -1.154*** -7.704*** -0.828*** -0.792** -10.63***
(0.208) (0.634) (0.328) (0.561) (0.419) (1.579) (0.116) (0.379) (3.968)
Hum 1.102*** 3.185*** 1.417*** 0.200 5.901*** 6.895*** 1.743*** 0.131 7.206**
(0.242) (1.181) (0.352) (0.913) (0.819) (1.828) (0.413) (0.560) (3.275)
Gdprh 0.812*** 0.590*** 0.509*** 0.0902* 0.175*** 0.520*** 0.0836*** 0.0746 0.321*
(0.0449) (0.148) (0.0652) (0.0547) (0.0655) (0.171) (0.0182) (0.0823) (0.183)
Opens 12.08*** 12.32*** 22.24*** 4.528 31.01*** 45.63*** -3.408*** 12.82*** 54.48**
(2.327) (4.767) (3.821) (2.795) (5.627) (10.08) (0.547) (3.222) (22.13)
Rexch -10.69*** -12.40*** -10.40*** -5.578*** -12.20*** -35.05*** -4.657*** -5.050*** -35.15**
(0.887) (2.672) (1.497) (2.058) (3.010) (6.139) (1.240) (1.807) (15.54)
Inst -4.821***
(1.662)
Eitim -3.621***
(0.651)
Eitic -3.677
(3.656)
Pstab -2.498***
(0.783)
Ccor 12.74***
(1.259)
Actby -8.678*
(4.838)
Reg 5.661***
(0.423)
Research Paper 421
Bur 4.630***
(1.262)
Rlaw 1.723
(4.148)
Constant 18.97 43.81*** 31.17** 27.65** 25.62 75.85** 26.26** 19.64*** 52.27
(14.72) (13.20) (12.34) (11.33) (15.81) (30.19) (12.89) (6.170) (45.33)
p-values in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1.
Natural Resources, Quality of Institutions and Foreign Direct Investment in Sub-Saharan Africa
25
26 Research Paper 421

The results also show that a well-structured and stable regulation will have a
positive and significant effect on non-extractive FDI. Regulatory reforms are, therefore,
highly valued by foreign firms in this sector, as is effective bureaucracy. However, it
appears that the level of impunity has a negative effect on non-extractive FDI flows,
even if the effect is only significant at 10%.
Overall, these results corroborate those of Gradeva (2010), Gwenhamo (2009),
Stein and Daude (2007) and Du et al. (2007) who argue that the quality of institutions
plays a fundamental role in determining the location of multinational firms abroad.
They are also in line with the conclusions of Asiedu (2003), Naudé and Krugell (2007),
Djaowe (2009), Benáček et al. (2012), Yosra et al. (2013) and Julio et al. (2013).
The results in table 9 show that the effect of natural resources on non-extractive
FDI flows is negative. This result corroborates the resource-FDI curse hypothesis
formulated by Poelhekke and Van der Ploeg (2010) and supported by Asiedu and Lien
(2011), according to which natural resources have a crowding-out effect on foreign
investment flows. The results obtained here confirm the hypothesis at the beginning
of the study, since they show that the curse relates to non-extractive FDI. For extractive
FDI, the weakness of institutions in the countries studied seems rather to be a blessing.
However, the size of the market, the human capital and the openness of the
economy substantially improve non-extractive FDI inflows.
Natural Resources, Quality of Institutions and Foreign Direct Investment in Sub-Saharan Africa 27

5. Conclusion
The study of the determinants of FDI has been the subject of much work. The existing
studies have resulted in giving pride of place to the quality of institutions. From this
point of view, it is considered that good institutions attract FDI and bad institutions
repel them. Yet it is still possible to observe that some attractive countries do not have
institutions of better quality than those of other countries which are less attractive.
Aleksynska and Havrylchyk (2012) argue that it all depends on the similarity between
the institutions of the investor’s country and those of the host country. This study
assumes that this could perhaps be explained by the sector of the host economy
that interests the investor. This assumption is confirmed at the end of the analysis
carried out using the PMG method on a sample of five SSA oil-exporting countries.
This means that investments in extractive activities are not sensitive to the quality of
institutions in general, and to a certain extent, weak institutions have an attractive
effect. However, the same institutions exert a crowding-out effect on inward FDI flows
to non-extractive activities. As argued by Aleksynska and Havrylchyk (2012), there will
always be firms to invest in the primary sector regardless of the quality of institutions.
In this way, it is possible in resource-rich countries to increase FDI inflows, especially
in non-natural resource sectors, by improving the quality of institutions. In particular,
the risks of political instability must be reduced by promoting true democracy and
decentralization, strengthening the control of corruption and accountability through
full transparency. In the same vein, countries with abundant resources have every
interest in joining the EITI and complying with the requirements of transparency.
This is because, it is an effective way to move away from unethical firms, and to
limit opportunistic behaviour that often leads to socio-political unrest. Moreover,
dependence on natural resources does not determine the quality of institutions.
Conversely, the low economic diversification of the countries studied is attributable
to the poor quality of their institutions. Unfortunately, the study does not determine
the origin of the quality of the institutions nor does it examine the effect of the
neighbourhood, which could nevertheless reveal the interdependencies between
countries and the need to conduct coordinated institutional policies.
28 Research Paper 421

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Natural Resources, Quality of Institutions and Foreign Direct Investment in Sub-Saharan Africa 33

Notes
1 From 1975 to 2002.
2 The Anti-balaka is an alliance of militia groups based in the Central African Republic.
3 Cameroon, Chad, Congo, Equatorial Guinea and Gabon.
 34 Research Paper 421

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