International Economics 150 (2017) 57–71

Contents lists available at ScienceDirect

International Economics
journal homepage: www.elsevier.com/locate/inteco

Do countries' endowments of non-renewable energy resources MARK

matter for FDI attraction? A panel data analysis of 125 countries
over the period 1995–2012
⁎
Aurora A.C. Teixeiraa,b,c, Rosa Fortea,b, , Susana Assunçãoa
a
Faculdade de Economia do Porto, Universidade do Porto, Portugal
b
CEF.UP, Portugal
c
OBEGEF, Portugal

A R T I C L E I N F O ABSTRACT

JEL codes: Empirical studies on FDI location determinants have neglected the role of natural resources.
F21 Panel data estimations for 125 host countries over the period between 1995 and 2012 show that
C19 a country's endowment of Non-Renewable Energy Resources (NRERs) matters for FDI
O13 attraction, when measured by the share of oil, coal and gas exports in total exports but not
Keywords: when measured by oil, coal and gas ‘proven reserves’. Thus, although to possess a vast amount of
FDI, Determinants of FDI proven NRERs is not a sufficient condition for FDI inflows, countries with low export
Non-renewable energy resources diversification, highly dependent on the exports of mineral fuel, tend to succeed in attracting
Panel data
FDI. This evidence supports the content that resource seeking FDI targets mainly economically
feeble countries. Moreover, our results firmly indicate that regardless NRERs endowments, FDI
attraction is fostered when countries make convincing efforts to open up their economies to
international trade and devote resources to the enhancement of their human capital, control of
corruption, and have more beneficial tax rates.

1. Introduction

Foreign direct investment (FDI) is regarded as a driving force behind economic growth (Wang, 2009; Aziz and Mishra, 2016).
Many governments see FDI as a way of dealing with stagnation and even the poverty trap (Brooks et al., 2010; Gohou and Soumaré,
2012).
The growing search for natural resources, in particular for non-renewable energy resources (NRERs), namely by economies that
are growing rapidly, has led to an increase in commodity prices, resulting in a renewed interest by governments in exploiting energy
resources and a redirection of FDI towards the mining sector (UNCTAD, 2007). Over the last twenty years, economic development
policies have tended to neglect investment in the mining sector (UNCTAD, 2007; Betz et al., 2015). However, in an age when energy
security is a global concern and countries, such as China, are attempting to take positions in mining companies around the world to
ensure future supply and thereby continued economic growth (Moran, 2010; Henson and Yap, 2016), it is important to understand
how far the endowment in NRERs, specifically ‘proven reserves’ (the economically extractable fraction of a resource using current
technology – see Grafton et al., 2004), is a factor that attracts inward FDI.
Despite the enormous amount of literature on FDI (see Faeth, 2009; Mohamed and Sidiropoulos, 2010; Chanegriha et al., 2016)
and non-renewable energy resources (for example, Crawford et al., 1984; Mitchell, 2009; Zhang et al., 2013), considered separately,

⁎
Corresponding author at: Faculdade de Economia do Porto, Universidade do Porto, Portugal.
E-mail addresses: ateixeira@fep.up.pt (A.A.C. Teixeira), rforte@fep.up.pt (R. Forte), assuncao.susana@gmail.com (S. Assunção).

http://dx.doi.org/10.1016/j.inteco.2016.12.002

Available online 09 December 2016

2110-7017/ © 2016 CEPII (Centre d'Etudes Prospectives et d'Informations Internationales), a center for research and expertise on the world economy. Published by
Elsevier B.V. All rights reserved.
A.A.C. Teixeira et al. International Economics 150 (2017) 57–71

not many studies have looked at the two topics together, establishing and appraising a (possible) correlation and causality between
these two variables. The few studies there are in this domain focus on a limited number of regions and countries including Sub-
Saharan Africa (SSA) (Asiedu, 2006; Ezeoha and Cattaneo, 2011), the Middle East and North African (MENA) countries (Mohamed
and Sidiropoulos, 2010; Aziz and Mishra, 2016), African countries (Sanfilippo, 2010), the Economic Community of West African
States (ECOWAS) (Ajide and Raheem, 2016), China (Cheung and Qian, 2009), India (Kumar and Chadha, 2009), Eurasia (Poland,
Hungary and the Baltic states) (Deichmann et al., 2003), the Southern African Development Community (SADC) (Mhlanga et al.,
2010), the nations from the ex-Soviet Union (Ledyaeva, 2009), the BRICS (Brazil, Russia, India, China & South Africa) (Jadhav,
2012), and a group of developing countries (Asiedu and Lien, 2011; Asiedu, 2013). Furthermore, except the works of Asiedu (2006),
Asiedu and Lien (2011), Ezeoha and Cattaneo (2011) and Asiedu (2013), such studies neither tend to look specifically at the possible
correlation and causality between FDI and NRERs nor at the particular relevance of the latter as determining the former.
The present study sets out to add evidence to this research area by analysing the role of NRERs in attracting FDI, controlling for a
set of factors that are traditionally regarded as influencing this last macroeconomic variable (for example, human capital, market
size, political stability, openness of the economy) (see Faeth, 2009; Chanegriha et al., 2016).
In order to pursue such endeavour, we resort to econometric panel data techniques involving 125 countries over the period
1995–2012. The set of countries considered is rather heterogeneous in terms of NRERs: around one quarter of the countries do not
possess ‘proven reserves’ (e.g., Finland, Portugal or Sweden), or have no/negligible share of NRERs in their total exports (e.g.,
Botswana, Central African Republic, Haiti), whereas 18% of the countries hold vast quantities of ‘proven reserves’ (e.g., China, USA,
India or Australia), and about 10% are large NRERs exporters (e.g., Algeria, Nigeria, Yemen, Rep., Kuwait, Saudi Arabia).
The paper is organised as follows. Section 2 gives a brief overview of the literature on endowments of NRERs and FDI. The
methodology is described in Section 3, with details on the econometric model, the proxy variables and relevant data sources. The
empirical results of the model are presented and discussed in Section 4. The last section sets out the main contributions, policy
implications, limitations of the study, and put forward future lines of research.

2. FDI and natural resource endowments: literature review

A myriad of factors are consider relevant to attract FDI. Among these stand (see Faeth, 2009; Chanegriha et al., 2016):
endowment related factors, most notably, non-renewable natural energy resources (NRERs) and human capital (Cleeve, 2008;
Asiedu, 2006); economic and political factors, which include market size (Mohamed and Sidiropoulos, 2010; Vijayakumar et al.,
2010), market growth, openness of the economy (Asiedu, 2006; Botrić and Škuflić, 2006), economic (in)stability, production costs,
financial and tax incentives, and infrastructure facilities (Biswas, 2002; Asiedu, 2006); institutional related factors, namely
corruption, political (in)stability (Asiedu, 2006; Mohamed and Sidiropoulos, 2010), and institutional quality.
The importance of each of these factors for attracting FDI is closely related to the motives for investors to carry out this type of
investment. Dunning and Lundan (2008) summarize the four main motives for companies producing abroad and conduct FDI:
‘market-seeking’, ‘resource-seeking’, ‘efficiency-seeking’, and ‘asset-seeking’ FDI.
The main purpose of market-seeking FDI is to supply the recipient country or nearby countries. Resource-seeking FDI aims at
achieving specific resources of better quality and at lower cost than the investor's country of origin. Efficiency-seeking FDI aims at
rationalize the structure of the existing investment and that was motivated by the search for markets or resources. Finally, the main
objective of strategic asset-seeking FDI is to keep or improving investor's global competitiveness, thus promoting its ‘long-term
strategic objectives’ (Dunning and Lundan, 2008). In this way, as stated by Dunning (1998, p. 9), “different kinds of investment
incentives are needed to attract inbound MNE activity of a natural-resource-seeking, c.f. that of a market – or efficiency-seeking, kind”.

Table 1
Summary of the main motives for FDI.

Motives for FDI Objectives Host country attractiveness factors

Market-seeking Maintain or protect markets previously supplied through exports
or exploiting or promoting new markets.
Resource- Minimizing costs and ensuring security of supply sources (e.g.
seeking demand for resources such as mineral fuels, agricultural products,
among others); Reducing the costs of labour (e.g. demand for
abundant supply of cheap unskilled or semi-skilled labour).
Efficiency- Re-organize international production (concentrating production in
seeking a few locations from the which supplies several markets) in order
to take advantage of several factors such as different factor
endowments, institutional frameworks, economic policies, among
others.
Asset-seeking Increase the investor's overall portfolio in terms of physical assets
and human skills, which it considers to contribute to maintain or
strengthen its specific advantages or weaken the ownership specific
advantages of its competitors.
Market size and growth; Psychic distance; Easy access to adjacent
markets.
Possession of natural resources such as mineral fuels; Abundant
endowment of unskilled and cheap labour; Access to skilled labour
and its cost.
Costs of resources such as land, raw materials or labour “adjusted for
productivity of labour inputs”; Reduced transport and
communication costs from and within the country; To be a member
of a regional integration agreement.
Competition policy, particularly with regard to mergers and
acquisitions; Several created assets (e.g. technological, managerial,
among others); Availability of ports, roads and other physical
infrastructure.

Source: Adapted from Dunning and Lundan (2008, p. 325).

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Table 2
Factor endowments in natural resources and FDI – summary of empirical studies.

FDI targeta (period of analysis) Proxy Method for data analysis Effect Author (s) (year)

Eurasia (1993–1998) Dummy variable (=0 if the country is poorly endowed in natural resources; =1 OLS regression + Deichmann et al. (2003)
if moderate; =2 if high)
30 SSA countries (1995–2008) Dummy variable (=1 if the country is classified as resource rich and zero GLS regression +/0 Ezeoha and Cattaneo (2011)
otherwise)
15 ECOWAS (2000–2013) Dummy variable (=1 if the country is classified as resource rich and zero Dynamic panel data +/0 Ajide and Raheem (2016)
otherwise)
1320 projects across 14 SADC countries (1994– Investments in the extractive industry and utility provision (water, gas, Pooled OLS and Panel data +/0 Mhlanga et al. (2010)
2005) electricity) (dummy)
Ex-USSR (1996–2005) Production index oil and gas Spatial autoregressive model + Ledyaeva (2009)
41 African countries (1998–2007) Production of crude oil Panel data + Sanfilippo (2010)
16 Arab economies 1984–2012) Total oil supply (production of crude oil, natural gas plant liquids, and other Dynamic panel data + Aziz and Mishra (2016)

59
liquids, and refinery processing gain)
12 MENA+24 Developing countries (1975–2006) Exports of mineral fuels (in log) Panel data + Mohamed and Sidiropoulos
(2010)
50 largest host countries (1991–2005) Share of raw material exports (including fuels, ores and metals) to its total Panel data + Cheung and Qian (2009)
merchandise exports
22 SSA countries (1984–2000) Share of mineral fuels in total exports Panel data + Asiedu (2006)
112 developing countries (1982–2007) Dynamic panel data – Asiedu and Lien (2011)
BRICS (Brazil, Russia, India, China and South Panel unit-root test, and multiple – Jadhav (2012)
Africa) (2000–2009) regressions
99 developing countries 1984–2011) Dynamic panel data – Asiedu (2013)

Legend: +positive effect and statistically significant; - negative effect and statistically significant; 0 effect not statistically significant. SSA - Sub-Saharan Africa; MENA - Middle East and North Africa; SADC - Southern African
Development Community; ECOWAS - Economic Community of West African States.
Source: Compiled by the authors.
a
Country is the analysis unit for all studies cited.
International Economics 150 (2017) 57–71
A.A.C. Teixeira et al. International Economics 150 (2017) 57–71

Table 1 synthetizes the main motives for FDI, their objectives, as well as some host country attractiveness factors.
Regarding the resource-seeking FDI, which is particularly relevant to our work in that the focus is on the role of natural
resources, Sanfilippo (2010) report that recently several African countries have been targeted as the main destination of Chinese
FDI given the growing needs of the country in natural resources, thus advocating a positive relationship between natural resource
endowment and FDI. Indeed, the NRERs are currently at the centre of the discussion about energy security (Moran, 2010;
Wolf, 2014; Capellán-Pérez et al., 2015). According to some authors (for example, Velthuijsen and Worrel, 1999; Salim et al.,
2014), natural energy resources, especially NRERs, such as oil, coal and natural gas, have been playing a key role in economic
development.
Empirically, existing studies on the relationship between the natural resources endowments and FDI show mixed results (cf.
Table 2).
Most studies (Deichmann et al.., 2003; Asiedu, 2006; Cheung and Qian, 2009; Ledyaeva, 2009; Mohamed and Sidiropoulos,
2010; Sanfilippo, 2010; Aziz and Mishra, 2016) obtained a positive relation between natural resources endowments and FDI. For
instance, Ledyaeva (2009) looked at the nations from the ex-USSR in the period 1995–2005 and noted that the regions richer in
natural resources, measured by the oil and natural gas production index, attract higher amounts of FDI. Controlling for a huge set of
factors that may influence the inflow of FDI to Eurasia countries in the period 1989–1998 (for example, reform measures,
importance of private sector in the economy, GDP and per capita GNP, inflation rate, number of years the economy is (was) under
central planning, rule of law, investment climate; human and social capital), Deichmann et al. (2003) mention that these countries,
rich in oil and natural gas, would not be attractive were it not for these resources.
Ezeoha and Cattaneo (2011) and Ajide and Raheem (2016) obtained, in some estimated models, a positive relation between
natural resources endowments and FDI whereas in other models results were inconclusive. Mhlanga et al. (2010) also obtained
inconclusive results for the impact of natural resources endowments on FDI in the SADC countries.
Finally, there are studies (Asiedu and Lien, 2011; Jadhav, 2012; Asiedu, 2013) which found a negative relation between FDI and
natural resources endowments. Asiedu and Lien (2011), studying a group of 112 developing countries for a period of 25 years
(1982–2007), and analysing the interaction between democracy, natural resources export intensity and FDI, concluded that natural
resources have a negative direct effect on FDI and “significantly alter the relationship between FDI by reducing the positive effect of
democracy on FDI” (Asiedu and Lien, 2011, p.106). Later, and focusing on BRICS economies, Jadhav (2012) also evidenced that
natural resource availability had significant negative effect on total inward FDI, suggesting that FDI in these countries were not
resource-seeking. In a more recent paper, using data from 99 developing countries in the period 1984–2011, Asiedu (2013) also
obtained a negative effect of natural resources on FDI.1 The author established that the presence of good institutions attenuates the
negative impact of natural resources on FDI but does not completely neutralize it.
All the empirical studies mentioned above use econometric models to gauge the relevance of natural resources in attracting FDI
in various countries. It can be seen that, even though the studies that examine the relevance of natural resources to attract FDI are
unanimous as to the importance of this determinant, most of them do not look specifically at NRERs. Those that do (for example,
Deichmann et al., 2003; Ledyaeva, 2009; Mohamed and Sidiropoulos, 2010) focus on very specific regions of the world (Central and
Eastern Europe, Central Asia, and the MENA countries). Thus, our study is intended to add empirical evidence on the special
relevance of NRERs and their (possible) correlation with FDI. We use panel data techniques and look at a large group of countries,
including countries having NRERs endowments, with the aim of establishing a relation between a country's endowment of such
resources and its performance in terms of FDI attraction.

3. Methodology

3.1. Data and variables

The present study examines the determinants of FDI inflows in 125 countries over the period from 1995 to 2012 (see Table A1 in
the Appendix for the list of countries). Table A2, in the appendix, provides information about the proxies for the relevant variables,
namely the sources of data and their definitions.
Following the literature (see Aziz and Mishra, 2016), we categorize the determinants of FDI inflows in three main categories:
endowment (non-renewable energy resources, human capital), economic and policy (market size, market growth, trade openness,
economic instability, production costs, tax rate, infrastructure), and institutional quality (corruption control, political stability, rule
of law).

3.1.1. Foreign direct investment (FDI)

As is standard in the literature (see Biswas, 2002; Asiedu, 2006; Mohamed and Sidiropoulos, 2010; Asiedu and Lien, 2011), the

1
Asiedu and Lien (2011) explain the existence of a negative relationship based on the following arguments. First, the abundance of natural resources tends to
induce an appreciation of the respective local currency which reduces competitiveness of the country's exports, discouraging FDI in other sectors. Second, natural
resources, especially oil, “are characterized by booms and busts”, contributing to a high fluctuation of the exchange rate; furthermore, a high share of exports of fuels
and minerals in total exports indicates low export diversification and consequent increase in the country's exposure to external shocks. These two factors “generate
macroeconomic instability and therefore reduce FDI” (Asiedu and Lien, 2011, p.104). Finally, in countries rich in natural resources FDI tend to converge to the
natural resource sector which although calling for a large initial capital investment requires small amounts for operations that follow. “Thus, after the initial phase,
FDI may be staggered” (Asiedu and Lien, 2011, p.104).

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dependent variable is the net inflows of FDI in percentage of the GDP. It encompasses new investment inflows less disinvestment
regarding the acquisition of a lasting management interest (10% or more of voting stock) in an enterprise operating in an economy
other than that of the investor.

3.1.2. Endowments

3.1.2.1. Non-renewable natural resources. Several studies (e.g., Deichmann et al., 2003; Mhlanga et al., 2010; Ezeoha and
Cattaneo, 2011; Ajide and Raheem, 2016) use dummy variables as proxy for natural resources endowments. Ezeoha and Cattaneo
(2011) and Ajide and Raheem (2016) chose to use a dummy variable which takes the value one if the country is classified as
abundant in natural resources and zero in the opposite situation, whereas Mhlanga et al. (2010) used a dummy variable related to
investments in mining industry. In turn, Deichmann et al. (2003) ranked a country's natural resources endowment at three levels
(poor, moderate and high endowment).
Other authors (e.g., Ledyaeva, 2009; Sanfilippo, 2010; Aziz and Mishra, 2016) use production indicators rather than dummy
variables. For instance, the study by Aziz and Mishra (2016) on the location determinants of foreign direct investment to 16 Arab
economies employs the total oil supply as proxy for natural resources endowments (which includes the production of crude oil,
natural gas plant liquids, and other liquids, and refinery processing gain).
The share of mineral fuel (oil, coal, gas) exports in total exports is the most used proxy (see Asiedu, 2006; Asiedu and Lien, 2011;
Asiedu, 2013). Mohamed and Sidiropoulos (2010), studying the MENA countries, also used mineral fuels but in levels. Analysing
FDI from the investor's point of view, Cheung and Qian (2009) use a wider proxy (including, beside mineral fuels, ores and metals)
which represents the demand for sundry raw materials in the various countries.
In this context, and following the scarce literature available, one of the proxies used in the present study to measure NRERs
endowments is the share of fuel minerals (i.e., coal, oil and natural gas) in total exports.
It is important to note that most non-renewable resources are not wholly available for extraction, since only a small fraction of
minerals overcomes the mineralogical barrier, with 'proven reserves' being the economically extractable part of a resource (Grafton
et al.., 2004). Although it is technically possible to extract resources from beyond the mineralogical barrier, the cost is excessively
high and so extraction takes place only up to the barrier. ‘Proven reserves’ are thus confined to a small part of existing resources,
which affects the scarcity of resources and stresses the importance of such reserves to economic development (Cleveland and Stern,
1999).
A number of countries, such as Cameroon, Chad or Ecuador, although possessing a negligible amount of ‘proven reserves’ of NRERs
nonetheless register a high ratio of fuel exports in their total exports. It is therefore pertinent to use a proxy based on ‘proven reserves’ in
addition to the more traditional proxy, the share of fuel minerals in total exports. To the best of our knowledge no empirical study has
yet been published that examines the effect of holding oil, coal and natural gas ‘proven reserves’ on FDI attraction.
Given that the proven reserves of each of the three resources are expressed in different units (oil in barrels, coal in tonnes, and
natural gas in m3), for comparability purposes they have been converted to TOE (tonnes of oil equivalent), taking barrels of oil to be
American barrels (42 US gallons being approximately 158.9873 l). Resorting to The International Energy Agency definition of tonne
of oil equivalent (TOE), we considered 1 BOE (barrel of oil equivalent)=0.14 TOE; 1 TCE (tonne of coal equivalent)=0.7 TOE; and
103 m3 natural gas=0.82 TOE (see also Heitor et al., 2000).

3.1.2.2. Human capital. Several seminal studies (e.g., Lucas, 1990; Dunning, 1998; Noorbakhsh et al., 2001) underline that lack of
human capital discourages foreign investment in both less-developed and developing countries. Zhang and Markusen (1999) and
Teixeira and Tavares-Lehmann (2014) evidence that the availability of skilled labour in the host country is a direct requirement of
multinationals and affects the volume of FDI inflows.
In line with more recent literature in the area, human capital is measured by the average number of years of schooling of the
working-age population (Teixeira, 2005; Barro and Lee, 2013).

3.1.3. Economic and policy

3.1.3.1. Market size. Market size is seen by the empirical literature as being crucial to attracting FDI (Schneider and Frey, 1985;
Mhlanga et al.., 2010), such that countries with a larger domestic market will be more attractive to investors because of the
greater number of potential consumers. Some authors (Botrić and Škuflić, 2006; Mohamed and Sidiropoulos, 2010) use the
number of inhabitants as a proxy of this determinant. But it is felt that this indicator does not give a true picture of the
attractiveness of the market, especially in a broad sample of countries which includes underdeveloped, developing and developed
nations, as a large population need not translated into a large number of consumers if they lack purchasing power (Ietto-Gillies,
2005). Based on the empirical literature, therefore, per capita GDP was deemed a more suitable indicator to measure the
influence of market size.

3.1.3.2. Market growth. When it comes to potential for market growth, the literature (for example, Mhlanga et al., 2010;
Mohamed and Sidiropoulos, 2010) generally suggests using the GDP or GNP growth rate as a proxy for this determinant. A high
growth rate for the market should attract more FDI since a growing economy offers more opportunities for higher profits. So the

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real GDP growth rate is used as a proxy as it is corrected for the effect of price variation, thereby giving more credible information
on GDP growth.

3.1.3.3. Trade openness. Openness of the economy is seen in the literature as one of the key determinants of FDI (Vijayakumar
et al., 2010; Chanegriha et al., 2016). A country can increase its attractiveness by adopting a policy that favours foreign trade,
encouraging domestic producers to export, increasing their profitability and attracting foreign investors (Mohamed and
Sidiropoulos, 2010). Based on the empirical literature (Botrić and Škuflić, 2006; Cleeve, 2008), we decided to use the weight of
foreign trade in GDP to measure the degree of openness, such that the greater the ratio the more open the country and the more FDI
it would attract (Cleeve, 2008). A positive relation of this determinant with FDI is thus expected.

3.1.3.4. Economic instability. Since high or volatile rates of inflation are a clear sign of economic instability (Botrić and Škuflić,
2006), the rate of inflation was chosen as a proxy for measuring each country's economic instability. High inflation rates distort
economic activity and reduce investment in productive industries, leading to lower economic growth (Mohamed and Sidiropoulos,
2010). So we expect that high inflation discourages FDI.

3.1.3.5. Production costs. Issues of cost reduction and increasing competitiveness often tempt firms to relocate their production
facilities in places where such costs are lower (Dunning and Lundan, 2008), specifically labour costs, with worker's wage being the
proxy most often referenced in the literature (Schneider and Frey, 1985; Biswas, 2002). We therefore expect that low production costs
attract larger FDI inflows. In our study, the large size of the sample, on the one hand, and the inclusion of countries with scanty
statistical information on the other mean that this indicator could not be used. Two other indicators were chosen instead. The first is
the unemployment rate, which aims at measuring labour market rigidity (see Cockx and Ghirelli, 2016) and thus an important part of
labour related costs. The higher the unemployment rate the more rigid the labour market and the less attractive it will be for investors.
The second indicator relates to the cost of imports (measured in USD by container). This includes all import costs – administrative
charges, the cost of keeping customs facilities, transport, customs clearance, and other expenses – that can be a determinant in the
choice of location (see Husan, 1996), since this can be a significant cost in raw materials or machinery that has to be imported.

3.1.3.6. Tax rate. Even though the empirical literature suggests temporary tax exemptions, tax concessions and ease of repatriation
of profits as indicators of financial and tax incentives (Cleeve, 2008), the large size of the sample meant that none of these data could
be obtained for all the countries. So the total tax rate (as percentage of commercial profits) was chosen instead, since this indicator
expresses all the taxes payable by a firm. According to the literature (see Tavares-Lehmann et al., 2012) it is expected that countries
with lower tax rates will tend to attract greater inward flows of FDI.

3.1.3.7. Infrastructure. With respect to infrastructure, two proxies were used to measure their quality: the number of phone lines
per 100 inhabitants and the losses of electric power transmission and distribution (in percentage of the output). As the sample
includes a range of countries with widely divergent degrees of development – developed and developing countries – from all over the
world, the first proxy should fit the development level of the developing countries better and the second should identify the different
degrees of development among the developed countries. Bearing in mind the relevant literature, we expect that good infrastructure
(expressed by the high number of phone lines and/or a smaller loss of electric power transmission and distribution) would be
attractive to foreign investors (Biswas, 2002; Asiedu, 2006).

3.1.4. Institutional quality

3.1.4.1. Corruption control. In the spirit of extant empirical literature (for example, Asiedu, 2006; Cleeve, 2008; Aziz and Mishra,
2016), we chose the World Bank's Worldwide Governance Indicator, ‘control of corruption’, as a proxy for a country's level of
corruption. The higher the ‘control of corruption’ (a standardized measure with a maximum of, approximately, 2.5, and a minimum
of −2.5), the lower the perceptions of citizens that public power is exercised for private gain and/or the "capture" of the state by elites
and private interests is substantial. High ‘control of corruption’ figures are thus linked to higher foreign investment.

3.1.4.2. Political stability. Some authors, such as Mhlanga et al. (2010), use the risk rating of a country to measure political
stability. But given the difficulty in obtaining this indicator, an alternative was chosen: the political stability and absence of violence
and terrorism measure. This proxy measures the perceived improbability of political instability and/or politically-motivated
violence, including terrorism. It can take values from −2.5 to 2.5 and the higher the score the greater the stability. It is expected that
high levels of political stability, which reflect low political risk, tend to attract more FDI.

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3.1.4.3. Rule of law. With respect to institutional quality, we followed Asiedu (2006) and took the degree of effectiveness of the rule
of law as a proxy. This indicator measures the extent to which agents have confidence in and abide by the rules of society, and in
particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and
violence. The closer to 2.5 (maximum) the greater the confidence. It is thus expected that a high degree of effectiveness of the rule of
law should attract investors, since it offers them greater security.

3.2. Econometric estimation

Panel data estimations have a few advantages over the traditional cross-country models, permitting to study the dynamics of
adjustment and to estimate their effects over a long period of time. On the one hand, panel data can analyse a set of variables for a
great number of countries, which provides more information. Panel data estimations also assume that countries are heterogeneous,
with specific and unobservable characteristics. ‘Cross-section’ and ‘times series’ estimations do not control for this heterogeneity,
meaning the results may be biased (Greene, 2011).
Therefore, to estimate the effects of relevant variables, namely non-renewable energy resources (NRERs), on FDI inflows we
opted for the estimation of panel data, such as in more recent studies which seek to assess FDI determinants (e.g., Helmy, 2013;
Okafor et al., 2015).
According to the literature review, the econometric model specification to estimate is (all variables are expressed in logs):

FDIit = b1 + b2 NRERit + b3 HCit + b4 MSit + b5 MGit + b6 TOit + b 7 EIit + b8 PCit + b 9 Taxit + b10 INFRit + b11 CCit + b12 PSit + b13 RL it
+ ui + εit
where i represents the countries’ index and t represents time.

FDI FDI inflows as percentage of the GDP

NRER non-renewable energy resources (exports of NRER in total exports; proven reserves)
HC human capital stock (average years of schooling of the adult population)
MS market size (GDP per capita)
MG market growth (real average GDP annual growth)
TO trade openness (sum of exports and imports in total GDP)
EI economic instability (inflation rate)
PC production costs (unemployment rate; cost of imports)
Tax tax rate (total tax rate in percentage of commercial profits)
INFR infrastructure (fixed telephone subscription per capita and losses, in percentage of output, of electric power transmission
and distribution)
CC corruption control
PS political stability
RL rule of law
ui the unobserved time-invariant fixed effect
εit the unobserved random coefficient

4. Results

In order to investigate the possibility of non-stationarity in the dataset, it is first necessary to determine the existence of unit
roots in the data series. For this study we have chosen Levin et al., (2002) and Harris and Tzavalis (1999) tests.2 The combined
results of the panel unit root tests indicate that all variables are I(0), showing that the null hypothesis of a panel unit root (non-
stationarity) in the level of the series can be rejected (see Table 3).
The three proxies for institutional quality are (expectedly) highly correlated (see Table A3 in Appendix). Moreover, one of the
proxies for infrastructure (fixed telephone subscriptions) is also highly correlated with several variables (human capital, control of
corruption, rule of law, GDP per capita). Thus, to avoid multicollinearity, we considered 6 distinct specifications (see Table 4): three
considering each institutional quality proxy in isolation (Models 1: control of corruption; Model 2: Political stability; Models 3: Rule
of law), combined with the two infrastructure proxies (Models 1–3: fixed telephone subscriptions; Models 4–6: electric power

2
The Levin et al., (2002) test has as the null hypothesis that all the panels contain a unit root. Because the LLC test requires that the ratio of the number of panels
to time periods tend to zero asymptotically, it is not well suited to datasets with a large number of panels and relatively few time periods. Thus, it is adequate to
complement the analysis with the Harris and Tzavalis (1999) test. This also has a null of unit root versus an alternative with a single stationary value, but it is designed
to be applied to data sets which are relatively short in T.

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A.A.C. Teixeira et al. International Economics 150 (2017) 57–71

Table 3
Descriptive statistics and unit roots tests of the variables.

Group of Variable Proxy Mean St. deviation Min Max Unit root tests
determinant
LLC HT Time trend

FDI Net FDI inflows (in % of 4.1 6.065 −16.1 87.4 −5.399 ***
−26.737 ***
Not
the GDP) (0.000) (0.000) included
Endowments Natural factors NRER exports (% of 16.3 25.648 0.0 99.7 3.869 −15.704*** Not
merchandise exports) (0.999) (0.000) included in
HT
Proven NRER 35458.0 177226.1 0.0 2812635.0 −63.883*** −1.256 Not
(0.000) (0.104) included in
LLC
Human capital Mean years of schooling 6.5 1.762 0.6 13.1 −20.213*** −0.073 Not
(0.000) (0.4711) included in
LLC
Economic and Market size GDP per capita, PPP 14550.1 15749.6 369.8 95751.3 −21.481*** 5.754 Included
policy (constant 2011 (0.000) (1.000)
international $)
Market growth GDP per capita growth 2.7 4.802 −18.9 92.4 −6.469*** −38.693*** Not
(annual %) (0.000) (0.000) included
Trade openness Trade (% of GDP) 80.3 49.370 15.6 450.0 7.3e+14 −4.374*** Not
(1.000) (0.000) included in
HT
Economic Inflation, GDP deflator 16.5 138.697 −27.0 5399.5 −8.509*** −35.442*** Not
instability (annual %) (0.000) (0.000) included
Production Unemployment, total (% of 8.6 6.049 0.6 39.3 −1.987** −6.032*** Not
costs total labour force) (0.024) (0.000) included
Cost to import (US$ per 1417.7 966.026 64.4 8525.0 −0.451 −10.904*** Included
container) (0.326) (0.000)
Tax rate Total tax rate (% of 50.1 35.354 7.4 339.1 2.9e+13 −2.076** Not
commercial profits) (1.000) (0.019) included in
HT(1)
Infrastructure Fixed telephone 19.0 19.261 0.0 74.8 −15.919*** 9.789 Not
subscriptions (per 100 (0.000) (1.000) included in
people) LLC
Electric power 15.1 11.757 0.0 98.4 −11.550*** −14.386*** Not
transmission and (0.000) (0.000) included in
distribution losses (% of HT
output)
Institutions Institutional Control of corruption 0.0 1.039 −2.1 2.6 −2.794*** −5.979*** Not
quality (0.003) (0.000) included
Political stability and −0.2 0.941 −3.0 1.7 −17.034*** −5.764*** Not
absence of violence/ (0.000) (0.000) included in
terrorism HT
Rule of Law −0.1 0.995 −2.2 2.0 −2.316*** −0.717 Not
(0.010) (0.237) included in
LLC

Note: LLC is Levin–Lin–Chu (adjusted t*), HT is Harris-Tzavalis (z). For LLC and HT, the null hypothesis: panels contain unit root, while the alternative Ha: panels
are stationary. P-values in brackets. ***(**) [*]denotes significance at the 1% (5%) [10%] levels for p-values; (1)no constant and subtracting cross-sectional means in the
case of HT test.

transmission and distribution losses). Then, we estimate the six specifications including, separately, each natural resource proxies
(Models A – NRER exports; Models B – Proven NRER).3
The fixed effects model was favoured over the random effects model by the Hausman test.
The models estimated present a reasonable fit, with F-stat indicating that all models are overall significant and R2 with values in
line with previous studies using similar estimation methods (e.g., Asiedu, 2006; Mohamed and Sidiropoulos, 2010).
Our estimates unambiguously evidence that even when controlling for economic, policy and institutional quality factors,
countries whose exports are highly concentrated in oil, coal and gas tend to attract FDI. All other factors being held constant, if the
share of non-renewable energy resources (NRER) exports increase by one percent, we would expect that, on average, the ratio of FDI
in GDP of the countries included in our sample increases by 0.02–0.03%. This result is in line with the studies by Asiedu (2006) or
Cheung and Qian (2009), but contrast with those by Asiedu and Lien (2011), Jadhav (2012), and Asiedu (2013) (all these studies use

3
Human capital and GDP pc are also highly correlated. We estimated additional combinations of models considering each of these variables separately. However,
estimations results did not differ from those presented in Table 4. Therefore to keep the presentation of results simple, we opted to not present the whole combined
estimations.

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A.A.C. Teixeira et al. International Economics 150 (2017) 57–71

Table 4
Determinants of FDI attraction: fixed effects panel data estimations (dependent variable –FDI/GDP ratio in logs)

the same proxy as we for measuring countries’ natural resources endowments). Thus, as the evidence gathered for Sub-Saharan
Africa (Asiedu, 2006) and China's outward FDI (Cheung and Qian, 2009), we conclude that FDI is largely driven by natural
resources. In short, our results are consistent with the resource-seeking strategy (Dunning and Lundan, 2008).
Interestingly, however, when we use ‘proven reserves’ (i.e., recoverable and economically profitable reserves) as proxy for natural
resources endowments we find that NRERs fail to emerge as a significant determinant of FDI.
Up to the present date, no study used ‘proven reserves’ as proxy for NRER endowments. The closest proxy might be the
production/supply of oil and gas used by Ledyaeva (2009), Sanfilippo (2010), and Aziz and Mishra (2016). Differently from our
results, Ledyaeva (2009) suggests that oil and gas resources are key determinants of FDI inflows into Russia, whereas Sanfilippo
(2010) demonstrates that Chinese investors in Africa are motivated by the search for long-term access to natural resources, and Aziz
and Mishra (2016) find that the total oil supply positively affects FDI inflows to Arab economies.
Our results seem to entail that being highly endowed in ‘proven’ NRER does not necessarily imply that a country will attract more
FDI. In other words, the impact of natural resource abundance on FDI is highly contingent on countries’ exports being little
diversified and dependent on mineral fuel related resources (petroleum, coal, or natural gas).
Regarding the remaining FDI determinants, our results follow quite closely extant literature in the area.
Human capital emerges significantly, albeit less strongly as other studies suggest (see Chanegriha et al., 2016). Such result
advises the need for schooling/skills to be promoted/developed among adult active population if a country wishes to attract FDI.
Thus, as Aziz and Mishra (2016, p. 343) refer a “well-educated labour force can be a key element in attracting FDI”.
In our sample, over the period of analysis (1995–2012), both economic and policy, and institutions emerge as critical factors for
attracting FDI. The most significant determinants are ‘rule of law’ (related to the quality of contract enforcement, property rights),
‘trade openness’, and ‘market growth’. In concrete, a one percent improvement in the perceptions of quality of contract enforcement
or in trade openness leads, on average, to 0.18% increase in FDI inflows. The corresponding figure for ‘market growth (measured by
real annual GDP growth) is about 0.13%. This suggests, in line with other previous studies (e.g., Felisoni de Angelo et al., 2010;
Helmy, 2013; Okafor et al., 2015), that efforts made to improve the quality of institutions, fostering of policies that liberalise trade
regimes or stimulate internal markets demand do have an impact on FDI.
We further find that other policy and institutional factors, especially the factors that make the investment environment costly,
such as labour market rigidity, tax rate and corruption, have significant influence on FDI inflows. Specifically, our estimations
evidence that a one percent decrease in the unemployment rate or in total tax rate (in percentage of commercial profits) leads to
0.04% and 0.08% increase in FDI, respectively. Moreover, a one percent improvement in the perceptions of corruption control
results in a 0.10% increase in FDI inflows.
Market size, economic stability, and infrastructure facility do not seem to help build up the confidence of foreign investors and
increase FDI inflows, which contrast with several extant studies (e.g., Asiedu, 2006; Xaypanya et al., 2015).

65
A.A.C. Teixeira et al. International Economics 150 (2017) 57–71

5. Conclusions

The present study analysed the impact of a country's Non-Renewable Energy Resources (NRERs) endowments on FDI inflows in
a wide sample of countries over almost two decades (1995–2012). Controlling for a number of factors traditionally believed to
influence FDI (e.g., human capital, trade openness, tax rates, institutional quality), and resorting to fixed effect panel estimations the
study contributes to the scientific literature in the area in three main ways.
First, it contributes to the very scarce literature that specifically addressed the role of NRERs on FDI inflows. Among the few (13)
studies that includes NRERs as a determinant of FDI, only four Asiedu (2006, 2013), Ezeoha and Cattaneo (2011), and Asiedu and
Lien (2011) – explicitly examine the interaction between natural resources and FDI.
Second, the present study includes a more updated and wider heterogeneity of countries (125 countries: developed, developing, less
developed, and emergent; located in all continents; rich/poorly endowed in natural resources), over a longer period (18 years: 1995–2012),
than existing studies which explicitly or implicitly includes NRERs. The vast majority of the latter focuses particular/small set of countries:
Arab economies (Aziz and Mishra, 2016); Economic Community of West African States (Ajide and Raheem, 2016); Eurasia (Deichmann
et al., 2003); Sub-Saharan Africa countries (Asiedu, 2006; Ezeoha and Cattaneo, 2011); and BRICS (Brazil, Russia, India, China and South
Africa) (Jadhav, 2012). The works by Asiedu and Lien (2011) and Asiedu (2013) encompass a large number of countries (respectively, 112
and 99) but only consider developing countries. Regarding the time span, although four studies – Mohamed and Sidiropoulos, 2010; Asiedu
and Lien, 2011; Asiedu, 2013; Aziz and Mishra, 2016 – cover a longer period than ours, most of the existing studies focus their analysis on a
period of study inferior to fifteen years, with the latest year analysed being 2008 or earlier.
Third, it is to the best of our knowledge the first empirical study to assess the impact of ‘proven’ (the economically extractable
part of) NRERs on FDI inflows. We plainly demonstrate that the impact of NRERs endowments on FDI attraction is contingent on
how those endowments are measured. Highly resource endowed countries in terms of ‘proven reserves’ (of oil, coal and gas) do not
necessarily attract FDI, whereas those countries whose mineral fuel exports constitutes a large part of the corresponding total
exports tend to be privileged recipients of FDI. This evidence seems to support Mina's (2007) content that rich ‘proven’ NRER
countries have abundance of financial resources that makes them less reliant on overseas finance or that resource seeking FDI
targets mainly economically shaky countries (Ajide and Raheem, 2016).
Our results, nevertheless, stand in sharp contrast with the recent contribution by Asiedu (2013), who found that, even after
controlling for the quality of institutions and other relevant determinants of FDI, the share of natural resources in total exports
harmfully affects FDI. As referred to above, when using the share of mineral fuel exports in total exports we found a highly significant
and positive effect of NRER endowments on FDI.
Moreover, our estimates confidently indicate that when controlling for NRERs endowments, FDI attraction is fostered once
countries make convincing efforts to open up their economies to international trade and devote resources to the enhancement of
their human capital, control corruption, and have more beneficial tax rates.
Such results highlight the prominence of governmental actions over Nature's idiosyncrasies, in particular the importance of
investing in human capital, improving the quality of institutions (by controlling corruption and enforcing contracts and property
rights), and promoting policies to open/ liberalise the economy (by adopting export-oriented policies and eliminating/lowering taxes
on corporate profits).
Despite the contributions of the present study, several limitations should be itemized, which nevertheless constitute
promising avenues for future research. First, we did not consider the different final uses of the three types of resource – oil, coal,
and natural gas – which may lead to interesting conclusions on the targeting location of FDI based on the type of fuel. Future
research could explore this issue. Second, although our sample included a wider diversity of countries, such diversity was
somehow overlooked. It would also be interesting to divide the sample in developed and developing countries and assess the
extent to which results would hold for these two groups. Third, further improvements could be accounted for at the
methodological level by using the latest dynamic panel data models which allow for unobserved country-specific effects,
measurement errors, estimator bias due to persistency in time series, and even endogeneity problems (Bond et al., 2001; Vedia-
Jerez and Chasco, 2016).

Appendix A

See Appendix Tables A1–A3.

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A.A.C. Teixeira et al. International Economics 150 (2017) 57–71

Table A1
List of countries in the sample.

Albania Dominican Republic Latvia Russian Federation

Algeria Ecuador Lebanon Rwanda

Angola Egypt, Arab Rep. Lesotho Saudi Arabia
Argentina El Salvador Lithuania Senegal
Armenia Ethiopia Macedonia, FYR Serbia
Australia Finland Madagascar Sierra Leone
Austria France Malawi Singapore
Azerbaijan Georgia Malaysia Slovak Republic
Bangladesh Germany Mali Slovenia
Belarus Ghana Mexico South Africa
Belgium Greece Moldova Spain
Benin Guatemala Mongolia Sri Lanka
Bolivia Guinea Morocco Sweden
Bosnia and Herzegovina Haiti Mozambique Switzerland
Botswana Honduras Nepal Syrian Arab Republic
Brazil Hong Kong SAR, China Netherlands Tanzania
Bulgaria Hungary New Zealand Thailand
Burkina Faso India Nicaragua Togo
Cameroon Indonesia Niger Tunisia
Canada Iran, Islamic Rep. Nigeria Turkey
Central African Republic Ireland Norway Uganda
Chad Israel Oman Ukraine
Chile Italy Pakistan United Kingdom
China Japan Panama United States
Colombia Jordan Papua New Guinea Uruguay
Congo, Dem. Rep. Kazakhstan Paraguay Uzbekistan
Congo, Rep. Kenya Peru Venezuela, RB
Costa Rica Korea, Rep. Philippines Vietnam
Cote d′Ivoire Kuwait Poland Yemen, Rep.
Croatia Kyrgyz Republic Portugal Zambia
Czech Republic Lao PDR Romania Zimbabwe
Denmark

67
 Table A2
Model to be estimated – summary of variables and their proxies.

Determinant Variable Description Source Expected effect

on FDI
A.A.C. Teixeira et al.

Dependent variable Foreign direct investments (FDI) Foreign direct investment are the net inflows of World Bank, World Development Indicators [International
net inflows in percentage of the investment (new investment inflows less Monetary Fund, International Financial Statistics and
GDP disinvestment) to acquire a lasting management Balance of Payments databases, World Bank, International
interest (10% or more of voting stock) in an enterprise Debt Statistics, and World Bank and OECD GDP estimates.]
operating in an economy other than that of the
investor.
Endowments Natural factors Fuel minerals (coal, oil and natural Fuels comprise SITC Section 3 (mineral fuels, International Trade Centre Positive
gas) exports (% of merchandise lubricants and related materials).
exports)
Proven reserves Non-Renewable Energy Resources (Crude Oil International Energy Statistics, in http://www.eia.gov/
+Natural Gas+ Coal) proved reserves in tonne of oil beta/
equivalent. Proved reserves of crude oil/Gas/Coal are
the estimated quantities which geological and
engineering data demonstrate with reasonable
certainty to be recoverable in future years from
reservoirs under existing economic and operating
conditions.
Human capital Mean years of schooling Average number of years of education received by Barro and Lee (2013), UNESCO Institute for Statistics Positive
people ages 25 and older, converted from educational
attainment levels using official durations of each level.
Economic and Market size GDP per capita, PPP (constant GDP per capita based on purchasing power parity World Bank, World Development Indicators [World Bank, Positive

68
policy 2011 international $) (PPP). PPP GDP is gross domestic product converted International Comparison Program database]
to international dollars using purchasing power parity
rates. Data are in constant 2011 international dollars.
Market growth GDP per capita growth (annual %) Annual percentage growth rate of GDP per capita World Bank, World Development Indicators [World Bank Positive
based on constant local currency. national accounts data, and OECD National Accounts data
files]
Openness of Trade (% of GDP) Trade is the sum of exports and imports of goods and World Bank, World Development Indicators [World Bank Positive
economy services measured as a share of gross domestic national accounts data, and OECD National Accounts data
product. files]
Economic Inflation, GDP deflator (annual %) Inflation as measured by the annual growth rate of the World Bank, World Development Indicators [World Bank Negative
instability GDP implicit deflator shows the rate of price change in national accounts data, and OECD National Accounts data
the economy as a whole. The GDP implicit deflator is files.]
the ratio of GDP in current local currency to GDP in
constant local currency.
Production costs Unemployment, total (% of total Unemployment refers to the share of the labour force World Bank, World Development Indicators [International Negative
labour force) that is without work but available for and seeking Labour Organization, Key Indicators of the Labour Market
employment. database]
Cost to import (US$ per container) Cost measures the fees levied on a 20-foot container in World Bank, World Development Indicators [World Bank, Negative
U.S. dollars. All the fees associated with completing Doing Business project]
the procedures to export or import the goods are
included.
Tax rate Total tax rate (% of commercial Total tax rate measures the amount of taxes and World Bank, World Development Indicators [World Bank, Negative
profits) mandatory contributions payable by businesses after Doing Business project]
accounting for allowable deductions and exemptions
as a share of commercial profits.
Infrastructure Fixed telephone subscriptions (per Fixed telephone subscriptions refers to the sum of World Bank, World Development Indicators [International Positive
(continued on next page)
International Economics 150 (2017) 57–71
 Table A2 (continued)
Determinant Variable
100 people)
Electric power transmission and
distribution losses (% of output)
Institutions Institutional quality Control of corruption*
Political stability and absence of
violence/terrorism*
Rule of Law*
69
Notes: *Estimate gives the country's score on the aggregate indicator, in units of a standard normal distribution, i.e. ranging from approximately −2.5 to 2.5.
Source: Compiled by the authors.
Description Source Expected effect
on FDI
active number of analogue fixed telephone lines, voice- Telecommunication Union, World Telecommunication/ICT
A.A.C. Teixeira et al.
over-IP (VoIP) subscriptions, fixed wireless local loop Development Report and database.]
(WLL) subscriptions, ISDN voice-channel equivalents
and fixed public payphones.
Electric power transmission and distribution losses World Bank, World Development Indicators [IEA Statistics Negative
include losses in transmission between sources of © OECD/IEA 2014]
supply and points of distribution and in the
distribution to consumers, including pilferage.
Control of Corruption captures perceptions of the World Bank, Worldwide Governance Indicators Positive
extent to which public power is exercised for private
gain, including both petty and grand forms of
corruption, as well as "capture" of the state by elites
and private interests.
Political Stability and Absence of Violence/Terrorism World Bank, Worldwide Governance Indicators Positive
measures perceptions of the likelihood of political
instability and/or politically-motivated violence,
including terrorism.
Rule of Law captures perceptions of the extent to World Bank, Worldwide Governance Indicators Positive
which agents have confidence in and abide by the rules
of society, and in particular the quality of contract
enforcement, property rights, the police, and the
courts, as well as the likelihood of crime and violence.
International Economics 150 (2017) 57–71
A.A.C. Teixeira et al. International Economics 150 (2017) 57–71

Table A3
Correlation matrix.

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