Natural resource revenues: Effect on the pattern of domestic investments relative to international assets investments

The question of interest in this essay is whether the presence of natural resource rents detracts from or contributes to domestic investments and economic diversification vis-a-vis international investments. In general, there is a positive relation between natural resource rents and domestic investments. However, evidence suggests that albeit resource-dependent economies are capital scarce, they tend to invest more in international markets proportional to domestic markets. We use a panel quantile regression to model the influence of natural resource revenues on the evolution of investments and precisely on the ratio of domestic capital investments relative to total international assets investments (Investment Pattern). Our results show that natural resource rents as percentage of GDP are negatively related to the ratio of domestic capital relative to foreign assets investments only in countries with resource rents per GDP above12.5%. Further, after adding an index for absorptive capacity, we confirm that in capital scarce economies, absorptive capacity plays an important role to bringing investments home at all quantiles of the investment patterns.