Predicting FDI inflows: Exploring a nonlinear relationship between peace years, oil wealth, and the rule of law

Abstract

Despite previous studies investigating the impacts of various factors such as peace years, natural resources, and the rule of law on foreign direct investment (FDI), empirical findings remain inconclusive. Therefore, this study investigates the interplay between these factors in shaping host country conditions that facilitate FDI inflows. Using generalized additive models, we examine the simultaneous effects of peace years, oil wealth, and the rule of law on FDI inflows in a sample of non‐OECD countries from 1970 to 2009. Our results reveal that established peace is a critical factor in attracting FDI inflows for both oil‐exporting and non‐oil‐exporting countries. However, the effects of the rule of law vary depending on oil wealth. Oil‐exporting countries receive more FDI inflows when they have a weak rather than a strong rule of law, while non‐oil‐exporting countries tend to receive more foreign investments when they have a moderately strong rule of law. We argue that countries with oil wealth combined with a moderately weak rule of law provide an environment that is conducive to multinational corporations (MNCs) in extractive industries seeking monopoly rents. Conversely, countries without oil wealth should create stable yet efficient environments that protect property rights and promote labor market flexibility to appeal to non‐resource‐seeking MNCs.