PhD Defense: Assi Okara

Essays on the Institutional Change Potential of Foreign Direct Investment in Developing Countries

Jury

Patrick Plane, DR CNRS, CERDI, UCA
Alban Ahoure, Professeur, Université Félix Houphouët Boigny
Mathilde Maurel, DR, CNRS, Université Paris 1 Panthéon-Sorbonne
Simone Bertoli, Professeur, CERDI, UCA
Michaël Goujon, Maitre de conférences HDR, CERDI, UCA
Emmanuel Pinto Moreira, Dr., Directeur ECCE, African Development Bank

Abstract

Institutional quality is considered one of the most important, if not the most important, determinants of long-run growth. For many development specialists, development gaps between rich countries and developing countries lie in the weakness of the latter group’s institutions, which results from both internal and external factors. Regarding external factors, the recent decades have seen a (overall) rapid and continuous increase in Foreign Direct Investment (FDI) flows to developing countries. This surge in FDI inflows, beyond its direct economic consequences in host countries, has other implications, notably for the institutional environment. Because good institutions reduce the cost of doing business for Multinational Corporations (MNCs), governments competing to attract FDI tend to align the institutional framework in their countries with the needs of foreign direct investors. In addition, MNCs can resort to lobbying and pressure to influence local institutions. Against this backdrop, this thesis examines how external actors, through FDI, can contribute to institutional development in the developing world. This thesis, therefore, explores the institutional change potential of FDI in developing countries through three chapters using suitable statistical and econometric tools. Each chapter explores a specific aspect of institutions, namely economic institutions, approached notably with the protection afforded to private property (Chapter 2), socio-political stability (Chapter 3), and corruption (Chapter 4). This thesis also explores heterogeneity in the forms of FDI, which could result in differential institutional impacts. Chapter 2 investigates how the quality of economic institutions in developing countries responds to changes in FDI inflows. The results show that economic institutions improve in countries with larger FDI flows and this effect is driven by FDI from developed economies while no significant link is detected for FDI from developing economies. Furthermore, they indicate that the positive institutional impact of total FDI is likely to be mitigated in countries where the natural resources sector represents a major driver of FDI. The findings suggest that the quality of the institutions in FDI origin countries matters in the FDI/economic institutions nexus in the developing world. Chapter 3 analyzes the potential of FDI to counter socio-political instability by improving economic opportunities. There- fore, it focuses on Greenfield FDI for its more direct impact on growth and job creation and thus its stronger socio-economic externalities. The results clearly evidence that Greenfield FDI favors political stability in the developing world. Accounting for the possibility for governments to use political repression to impose stability, this chapter also examines the influence of this variable in the FDI-political stability relationship. The results indicate that Greenfield FDI tends to promote political stability compliant with governments’ respect for human rights, therefore preserving individuals’ wellbeing. Accordingly, countries should pay more attention to such investments with the stronger impacts on growth and jobs creation as Greenfield FDI. Chapter 4 draws on the resource curse literature to investigate whether the impact of resource rents on corruption is conditional on the origin of capital used to produce these rents, focusing on FDI in the resource sector in Africa. We find that resource rents are more corruption-breeding in countries with higher FDI in the resource sector, compared to lower FDI countries where the relation is mixed. We also show that the quality of democratic institutions determines whether these countries can avoid the increase in their corruption resulting from higher resource FDI and higher rents. Our findings highlight that it is possible to counter the corruption-breeding effect resulting from higher resource FDI and rents through stronger democracy that promotes voice and accountability and therefore poses constraints on the exercise of the executive power.

Keywords

Institutions,property rights,FDI,Greenfield,socio-,political stability,corruption,resource rents,developing countries