FDI spillover in the Oil Industries Open Access
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In the first essay, a theoretical model establishes why there are NO negative spillover effects from foreign investment in the oil industries of developing countries. This is done with specific focus on side-payment transfers from foreign partners to host government officials in such resource-rich host countries along with government quality in such instances. In addition, this essay starts with a simple model to analyze the bargaining relationship between two parties: host government and International Oil Company (IOC).As oil interests in developing countries are largely publically owned, foremost it is important to understand that any IOC going abroad to invest in the extractive sectors of those countries must negotiate with the host government on oil project equity shares. Thus from the onset of relations, restriction and conflicts of interests are obviously born of this public versus private orientation. This becomes most notable in the distinct goals of the parties. For thereby the host government seeks to maximize revenue from the oil business on behalf of the common purse and the rent seeking IOC focuses on the profits due its largely foreign individual shareholders.In the second essay, complexity is added to the aforementioned first model by introducing more than two parties. For focus is placed on distinguishing the advantages and or capabilities inherit in the government negotiating with multiple IOCs and deciding between a simultaneous multilateral offer and a sequential bilateral offer on equity shares from resource value. In so doing, particular attention is given to the government’s imposition of a spillover requirement as to diversify the local economy and the trade-offs of that choice. Thence it will be further outlined how the government’s request for “spillover”, or those beyond the interaction of the IOC’s basic extraction protocol, traditionally leads to sacrifice of more direct revenue from equity shares pertaining to host country. Furthermore, provided that the host government treats all its foreign partners in a simultaneous negotiation as a single entity, it is argued that the government is predicted to gain a higher equity share from a simultaneous multilateral bargaining deal than a sequential bilateral one with each player. This is held consistent with the Stakelberg leader-follow model as supported by anecdotes of real world case studies. For thereby in a sequential offer the first firm gets a larger share than the second firm. The third essay develops a simple framework to analyze the links between local contents promotion associated with FDI in the oil industry and several elements of fiscal policy in a resource-rich host country. In particular, focus is placed on the role of side-payments in promoting local content policies and its interaction with fiscal instruments to analyze its impacts on the host country’s welfare, subject to both binding and non-binding constraints. Despite the case study results provided by the World Bank or United Nations regarding the role of local content promotion with FDI in the oil industry, the body of microeconomic theory modeling these phenomena in this particular industry is rather silent.