Transparency, institutions, and investment: The case of the extractive industries transparency initiative (EITI)

Abstract

Since the establishment of the Extractive Industries Transparency Initiative (EITI), many resource-rich countries have joined international transparency initiatives. Considering that resource-rich countries have historically preferred opacity, this trend is surprising. Once a country joins the EITI, the country reports on its revenues, contracts, and licenses related to natural resources. The disclosure of information on resource revenues could threaten the survival of the leadership in less transparent democratic and autocratic regimes. In the face of the threats posed by enhanced transparency, these countries maintain their EITI membership, but for what reason? Using newly released data, this study argues that countries participate in international transparency initiatives to signal a favorable economic environment to international investors. This study demonstrates that under the self-reporting mechanism, investors reward or punish a country according to the level of its EITI membership. Based on an empirical analysis of 128 countries using two-stage least squares regression and the instrumental variable estimation in order to deal with selection bias and endogeneity (2002–2015), this study finds that joining in the EITI has a stronger positive effect on the inflow of foreign direct in-vestment (FDI) in less transparent countries, than in more transparent ones.