Water Resources as Determinants for Foreign Direct Investments in Land - A Gravity Analysis of Foreign Land Acquisitions

Abstract

Worldwide increasing demand for agricultural products poses the critical question of where this additional production will take place. In this context, the phenomenon of large scale Foreign Land Acquisition (FLA) is one strategy that has been controversially discussed in scientific and public debates. A better understanding of what factors drive FLA-flows between investor and target countries is still needed. This project applies a gravity model to estimate the effect of agro-environmental determinants in target countries. The response variables are derived from improved data obtained from the Land Matrix Global Observatory and the explanatory variables from a range of climatic and agricultural data sets. The issue of large numbers of zero flows in such a data set is tackled using zero-inflating regression models. Overall the results highlight the crucial role of water resources, in particular the potential of rainfed crop production in the targeted areas, and not just land abundance alone as found in previous studies. Moreover, in line with previous studies, we show that in contrast to other types of investment flows, agricultural investment flows are not negatively affected by weaker institutional regulations or corruption.