Natural resources, economic freedom and Foreign Direct Investment in Africa

Using panel data for 37 African countries, this study explores the relationship between natural resources and the inflows of foreign direct investment, conditional on the level of economic freedom. For the latter variable, we used the economic freedom index computed by the Fraser Institute. Estimations conducted using the generalized method of moments show that a 1% increase in natural resources decreases FDI inflows by 0.197%. However, economic freedom is a potential channel to neutralize the adverse effect of natural resources on FDI. The threshold of the economic freedom index from which the negative effect of resources on FDI is reversed is 5.779 on a scale from 0 to 10. The degree to which the policies and institutions of countries are supportive of economic freedom, therefore, matters in tackling the FDI-natural resource curse in Africa. Among the different dimensions of economic freedom considered in the study, trade freedom, as well as the legal system and security of property rights are those that matter the most.