FDI in MENA: Impact of Political and Trade Liberalisation Process

This study focuses on FDI in Middle East and North African countries (MENA). To this end, we use data for greenfield investments from FDI Markets that contains information about the number and volume of projects by source and destination countries all over the world for the period 2003-2012. In a first step, we provide a comprehensive outlook of the nature and trend of FDI flowing to MENA. GIs have a relevant role as capital source for most MENA countries, it represents a higher share of GDP for MENA than for other developing countries. As expected, the Great Recession and the beginning of the Arab Spring had a negative impact on investments in this zone since GIs have failed drastically between 2009-2012, compared to the previous period. In a second step, we estimate a gravity equation to explain greenfield investments for 160 countries. Macroeconomic factors, cultural ties, and distance are the main determinants of MNEs’ decision to invest in a foreign country (extensive margin) while the amount of the projects might be determined also by other factors at the firm market levels (intensive margin). Concerning possible specificities of MENA as host countries, our results suggest that cultural ties do seem to have a relevant role across these countries: sharing the same religion and language foster investments in these countries more than in any other region. Distance and FTA lack specific relevance for FDI’s attractiveness in the region. All in all, FDI in MENA are clearly discouraged by cultural distance or informal trade barriers. Our results raise some doubts on usefulness of BIT to foster FDI in MENA like in the rest of the world. Thirdly, we investigate the role of institutional quality as pull determinants of GI. At the world level, democracy, political stability, lack of corruption and business freedom attract FDI while compliance of rule of law, and other indicators of ease of doing business do not appear to have a clear significant impact. Finally, greenfield investments are displaced from countries suffering violence towards neighbors’ countries. Other types of violence do not have at the world level any evident impact. Not all the MENA share these patterns. Improvements in democracy would not improve the attractiveness of MENA non-oil producers but political stability would boost FDI to these countries Besides, they are especially harmed by violence in their neighborhood as far as attracting GI is concerned. All in all, this draws the conclusion that investors may see the political transition to democracy as a source of political instability of the whole region. Worryingly, reducing corruption in these countries would reduce the number of foreign investments flying to non-oil producers MENA. According to our study, improving institutional quality is more likely to foster FDI in MENA oil producers than in MENA no oil producers while the presence of natural resources could be expected to undermine the positive impact of institutions' quality could have on FDI. This may be explained by the fact that the oil production of such MENA countries is so high and their dependence on FDI so low that governments have not developed special ties with MNEs while in other countries abundant in natural resources, nondemocratic governments have given special treatment to foreign investors.