Transparency, Institution, and Investment : The Case of the Extractive Industries Transparency Initiative (Eiti)

Since the creation of the Extractive Industries Transparency Initiative (EITI), many resource-rich countries have joined international transparency initiatives. Considering that resource-rich countries have historically had a preference for opacity, this trend is surprising. Once a country joins the EITI, the country is supposed to report their revenues, contracts, and licenses relating 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 that enhanced transparency poses, these countries keep the EITI membership, but for what reason? Using a signaling game and newly released data, this paper argues that countries participate in the international transparency initiative to signal a favorable economic environment to international investors. This paper shows that under the self-reporting mechanism, investors reward or punish a country according to the level of its EITI membership. Based on the empirical analysis of 128 countries using two-stage least squares regression in order to deal with selection bias (2002-2015), this paper finds that joining in the EITI has a stronger positive effect on the inflow of foreign direct investment (FDI) in less transparent countries, compared with more transparent countries