MiddleEast Oil Foreign Direct Investment Determinants

and Innovation , Development Management

IAE University of Nice Sophia Antipolis, DBA

Dr. Chen Tsu-Wee 陳祖維

尼斯大學工商管理博士

Prof. 陈継祥

Prof. TONY BROOKING

Abstract

The Middle East region is not only interesting from an academic perspective due to
the scarcity of research in the area. The region also provides a productive ground for
the development and testing of new theory due to several unique characteristics. The
features that make the regional in comparison unique in this situation are the presence
of large natural resource foundation in around half the countries in the region and the
presence of high levels of environmental risk. These elements make the Middle East
region particularly suitable for enforcing the understanding the role of oil natural
resources and environmental , economic and political risk in determining Oil FDI and
International Business flows.
The objectives and scope for the research have been determined on the basis of the
growing interest in Oil FDI in the Middle East region among policy makers and
investors, the lack of academic research that has been carried out on the excitation
area and the specific characteristics of the region. As a result, the research presented
in the aims to contribute to the understanding of Oil FDI, International Business in the
Middle East region . What are the determinants of Oil FDI and production of crude
oil in the MENA region?
The overall question can therefore be divided again into the following large scale and
small scale level sub-questions:
(i) What is the role played by different potential determinants of Oil FDI flows in the

Location and Internalisation (OLI) factors of 1980. The political situation is going to be important for determining whether investing in these countries is a good idea. the case study research demonstrates that in the MENA region.production. environmental and economic risk. don‘t see joint ventures as an effective way of managing environmental risk. The research is defined as the period 1987 – 2008. These factors in turn are reflected in a model of the determinants of Oil Investment in the MENA region. • 1. argued Ahmed. The determinants of inward Oil FDI flows include all articles identified on the determinants of Oil FDI flows that have been published since 1995. political variables and the role of transaction costs (TC) in determining location and operation processes decisions in the MENA region. PROBLEM FORMULATION (topic) 问题界定(主题) .OL factors. Generally. economic and political risk factors in attracting Oil FDI? (iii) Why do companies choose to invest in particular countries in the MENA region? (iv) Why do companies choose for particular entry operation modes or work processes when investing in the MENA region? It is possible to test and expand existing theory that has been developed on the topic of Oil FDI for regions in the MENA countries. lower Oil foreign direct investments (FDI). With respect to oil entry .political risk and energy or oil resource properties in Oil FDI flows and investment decision making. If BP invested in Venezuela or Iraq to produce oil. the research adds to International Business theories related to the relevant oil exporting. The political turmoil has disrupted economic activity the most in oil-importing countries such as Egypt and Tunisia. In this way.investment and operation mode theory. oil-importing countries are facing a number of pressures arising from sharp increases in international fuel and food prices. In summary.MENA region? (ii) What is the role played by different environmental .economic . This would be an example of foreign direct investment into Venezuela and Iraq. declines in tourism. as well as to develop new theory related to the role of OLI factors environmental . Political Stability and Oil FDI: why is political stability needed to attract Oil FDI? FDI = Foreign Direct investment. John Dunning‘s original test of Ownership. and higher borrowing costs. the period is long enough to include a number of years of low and high Oil FDI flows as well as a variety of scores on the various potential determinants of Oil FDI during the period. multinational companies with significant international experience in the MENA region within their core business.

and model driven governments and dictatorships.Background 2. 2. Pricing Stability(political transition and econonomic reformsand pricing stability are significant determinants). 2.3 United States crude oil imports in 2013. 2. account for 45%. Relationship between Oil FDI and Oil Reserves . Oil Foreign Direct Investment (FDI)and International Business Determinants( Oil itself.Economic and Environmental Issues affect Middle East Oil Foreign Direct Investment (religious conflict and wars).Political. or little in comparison to fossil fuel investments. China and USA import Crude Oil from Middle East a lot ( China 51% US 45%). Relationship between Oil FDI and Ownership . internal environment outside environment).1 Energy security is a growing concern for rich and emerging nations alike.supply and demand in a balance in a long turn). all countries 7730 (annual. Relationship between OilFDI and Political . FDI and Refinery capacity. FDI and Oil Export( Oil export is the significant determinant of 10 countries). 2. overthrow of democratically elected leaders.thousand barrels a day)OPEC (MENA mostly) 3493 (annual-thousand barrels a day). Relationship between Oil FDI and Supply and Demand (pricing adjustment affecting market in a short turn.2 Leading nations admit we are experienced the passion of oil. Economic. Relationship between Oil FDI and Crude Oil Production. but investment into alternatives has been lacking.4. Oil Prices(Oil reserves is not significant determinant). Location.United States Import Crude Oil by Country of Origin (Annual-Thousand Barrels Per day) .Internationalizaion(whole ownership environment is significant determinant). The past drive for fossil fuel energy has led to wars.

imports 9%came from Oman.China’s Crude Oil Imports in 2013. imports 6% came from Venezuela. by Source Country .2. imports 4% each came from United Arab Emirates and Kazakhstan. by Source Country In 2013 China’s crude oil imports 820 million tons. imports 2% each came from Brazil and Congo and imports 12% came from other countries.China’s Crude Oil Imports in 2013. 2. Total imports from Middle East .5.19% came from Saudi Arabia. account for 51%. imports 8% each came from Iraq and Iran. imports3% came from Kuwait.6.

more nations and companies are trying to invest in substitutes. however. In some countries—most notably Libya. leaders are currently focusing on political transitions. But will the geopolitics remain the same? Transition still continue: Dunne emphasized that the political transitions in the Middle East are still in motion. Syria. and who comes to power. . Outcomes are uncertain: In many countries.2. What should be the role of the rest of the world? As the global financial crisis takes hold and awareness of climate change increases. what forms of governments are created. Dunne said. and Yemen—Muasher suggested that the turmoil may last for an extended period.7. The success and scope of economic reform will depend on how these highly uncertain transitions evolve. Economic results are critical: Dunne noted that economic outcomes. play a vital role in political transitions. If economic problems emerge—particularly in Egypt—they could undermine political progress and stability.

Oil itself such as Oil FDI and Crude Oil Production. • The overall question can therefore be divided again into the following large scale and small scale level sub-questions: • (i) What is the role played by different potential determinants of Oil FDI flows in the MENA region? (factors happen in the future) • (ii) What is the role played by different environmental .2 The overall theme of the research can be summarized as the determinants of Oil Foreign Direct Investment (FDI) in the Middle East and North Africa (MENA) region.Contract. Support serious reforms: The United States and EU have favored stability over democracy promotion for years in the Arab world. 3.economic reform) • (iii) Why do companies choose to invest in particular countries in the MENA region? (high potential return. resulting in a process of specific problem. economic reforms.c. whole ownership environment) 4. Now.b.1. Oil Export Relations.2. . Muasher acknowledged. cost living) • (iv) Why do companies choose for particular entry operation modes or work processes when investing in the MENA region?( location. Methodology 方法论 : • What are the determinants of Oil FDI and production of crude oil in the MENA region? • The research is defined as the period 1987 – 2008.8 International actors must clearly define their support for countries in transition. the period is long enough to include a number of years of low and high Oil FDI flows as well as a variety of scores on the various potential determinants of Oil FDI during the period.Outside Environment such as Political .Internal Environment such Entry Mode.Research objectives 研究目标 4. production sharing contract. low cost. • 4.Economic Risk. but ultimately unserious. but should not attempt to force reform from the outside. Refinery Capability.Including a. economic and political risk factors in attracting Oil FDI? ( state policy. the international community needs to support serious political reforms that include opportunities for power sharing. In this way.

1000 kg) exporting 118 Mt.E.a legal contract between two parties. 20% for the company.888.the company use the money(cost oil) from produce oil to recover capital and operation expendures the remaining money (profit oil) is split 80%for government.Marginal Fields are located within an oil producing block. and (3) risk-service contracts. • 4.and China). (“PSCs” or “PSAs”).E R square 0.producing 208Mt importing 269 Mt From the estimation of the statistical model equation in Table 1 we can note that the relation between Oil FDI and Production of Crude Oil (PCO) is insignificant in 14 countries and significant only in two countries (U. and China R square 0.Oil FDI and Crude Oil Production Relation is strong in UAE . 5. (2) production sharing contracts (or agreements)a contract signed between a government and oil resource extraction company. in which the company signs a concession agreement so that it can do business in that government's country or licenses . .A.A.producing 153 Mt (metric ton. the IOC bears all the exploration cost.3According to Kyla Tienhaara there are three main types of foreign investment contracts in the upstream oil and gas sector: (1) concessions (privilege contract) a contract between a foreign company and a government. China : 2013U.714. the internal rate of return(IRR) 7-20% .

6). Oil FDI and Refinery Capacity relation is strong in case of China (R Square 0. and this relation is strong in case of China. . but it is weak in eleven countries and insignificant Results of estimations in statistical model equation in Table 2 shows that a positive relationship between Oil FDI and refinery capacity (RC) of all the selected countries. but it is weak in eleven countries and insignificant. 6.

9.Oil FDI and Export Crude Oil relation is positive in ten countries (R Square 6 Countries0. and this relation is positive between Oil FDI and XCO in ten countries from fifteen countries. and Oil FDI as independent variables whereas export of crude oil (XCO) is a dependent variable. 7.8.7)from fifteen countries In Table3.1 Countries0. from the results of estimations of statistical model equation we can conclude that there is a strong and significant relationship between PCO. RC.3 countries0. .

1 Political Stability and Oil Foreign Direct Investment: why is political stability needed to attract Oil FDI? . RC j . Oil FDI j) J denote country 8.Political Stability and Oil Foreign Direct Investment • 8. Model Specification PCO j= f (Oil FDI j) RC j= f (OIL FDI j) XCO j= f (PCO j .

as well as John Dunning‘s original test of Ownership. • 8. But BP maybe dissuaded from investing there because Risk of terrorist action. Location. references include all identified articles identified on the determinants of Oil FDI flows that have been published since 1995. the political situation is going to be important for determining whether investing in these countries is a good idea.4 Investing in Iraq may have high potential returns. driven by strong global demand and investment.2 With respect to oil entry . • 10. Cost of equipment.3 Clearly for countries like this.• 8.Relationship between Oil FDI and Oil Reserves . 9. .Relationship between Oil FDI and Ownership . 10. Possibility of ultra nationalist government being formed which seeks to nationalise Iraqi oil reserves. • 8. For example. Difficulty of getting workers to go and live in Iraq. multinational companies with significant international experience who are expanding geographically in the MENA region within their core business. • 9. the case study research demonstrates that in the MENA region.Internationalizaion • 10. limited spare oil production capacity.2 Crude oil prices have risen dramatically over the last few years. Location and Internalisation (OLI) factors of 1980.2 FDI = Foreign Direct investment. and continuing political instability in certain oil producing regions. Oil Prices • 9. This finding is in contrast to the strand of entry mode literature that sees joint ventures as simply an intermediate level of control between difficulty and full ownership.investment and operation mode theory. BP could then lose everything. if BP invested in Venezuela or Iraq to produce oil. don‘t see joint ventures as an effective way of managing environmental risk.1 Mina(2007) study provides stronger support for the negative role played by oil reserves and the positive role played by the world oil price in determining Oil FDI flows into the MENA region. • 8. cost in terms of lives. Other references from the literature have been included based on their aware connection to the research questions addressed.5 Future attitude of government cannot be guaranteed. This would be an example of foreign direct investment into Venezuela and Iraq.1 With respect to the specific question of the determinants of inward Oil FDI flows.

Mina(2007) study provides stronger support for the negative role played by oil reserves. don‘t see joint ventures as an effective way of managing environmental risk. XCO is a dependent variable.The oil company will continue to monitor the situation closely and will adjust the prices accordingly in the direction of the market.7-0. Relationship between Oil FDI and Supply and Demand • 11.reserve) of crude oil is a significant Oil FDI determinant in UAE and China. • Refinery capacity(oil downstream) is a significant Oil FDI determinant in China.2 Generally. and this relation is positive between Oil FDI and XCO in ten countries (R Square10Countries0. culture risk and integration risk. • 13. • 11. chemical injection or thermal recovery to improve the efficiency in the Oil extraction process.1 Prices for petrol are determined by global supply and demand and the market decides the price and investment. • China and MiddleEast target Oil FDI in high value offshore Oil service activities and give special attention to the quality of the banking and financial systems .utilization. 12. Conclusion • Export of crude oil is a significant Oil FDI determinant in Middle East and China. as advocated by Anderson & Gatignon (1986. the MENA region within their core business. 1988) and tested by Slangen & van Tulder (2009). . 11. The Innovation of Oil FDI Management • China and MiddleEast use Enhanced Oil Recovery Technology including gas injection. Surging (sudden increase) crude oil demand and investment is being fueled by strong economic growth. • China and MiddleEast designed to advance the comparative dynamic advantage institutions to upgrade the oil quality of its innovation systems. • Production (export. • Oil reserves is not a significant Oil FDI determinant . Results of estimations in statistical model equation realizes that relationship between Oil FDI and RC is weak in eleven countries and insignificant. the estimation of the statistical model equation that the relation between Oil FDI and PCOis insignificant in 14 countries. price adjustments in the market affect short-term supply- demand imbalances and bring supply and demand back into balance. • Joint venture is not a significant Oil FDI determinant.9)from 15 countries.

Jamola (2011). Oxford Journal 8(1). • Ownership. Determinants of Foreign Direct Investment in Central and Southeastern Europe: New Empirical Tests. Demand Side Factors A_ecting the Inow of Foreign Direct Investment to African Countries: Does Capital Market Matter? International Journal of Business and Management 5(5). World Development 38 (4). Roghieh. • Political and Economic stability are the significant Oil FDI determinants Oil Demand and Supply are the significant Oil FDI determinants. 2010. 143-154. Claire (2007). Tidiane. 2009. 2011.pdf Kinda. IPCBEE vol. 2007. The Innovation of Oil FDI Management including use Enhanced Oil Recovery Technology and advance the comparative dynamic advantage institutions and target Oil FDI in high value offshore Oil service activities 14.htm Kapuria-Foreman Vibha. International Conference on Environment and Bio-Science. McGuigan. (2006). The Causal Relationship between Information and Communication Technology and Foreign Direct Investment. • Oil price is a significant Oil FDI determinant. Lee et. Investment Climate and FDI in Developing Countries: FirmLevel Evidence. The Journal of Developing Areas 41(1). ‘Enhancing FDI inflows into Oil and Gas Industry: Case Study of Selected Countries in the World’. Zenegnaw Abiy. http://www.21.ipcbee. ‘The benefits of FDI: Is Middle east-Global Issue. al. 43-62.com/vol21/12--ICEBS2011G011. 133-149. (2010). The World Economy 29(1). Miroslav. 104-116. Location and Internationalization are the significant Oil FDI determinants.http://www.org/english/res_e/statis_e/statis_e. References: Gholami. Hailu. Singapore. Gas and Refinery Production and their Experts . 498-513. Economic Freedom and Foreign Direct Investment in Developing Countries. IACSIT Press. Mateev. Khusanjanova. by Robert Springborg Foreign Direct Investment and Its Effects on Oil. by Anup Shah The Energy Revolution’s inputs on The Arab World.wto.

U.S Imports crude Oil by Country of Origin by Pehdan & Quids Break Down of China’s Crude Oil Imports in 2013 by Source Country by statistra 陈継祥.(2013) Strategy Management 10(2)216-225.86(10)111-121 .Beijing Tsinghua University Press Hansen Mt. when internal collaboration is bad for your company(j) Harvard Business Review 2008.

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