Determinants of foreign direct and indirect investment in the MENA region

Abstract

Purpose – This study aims to examine the factors affecting the foreign direct investment (FDI) and foreign portfolio investment (FPI) flows among the 16 economies comprising the Middle East and North African (MENA) region. Design/methodology/approach – Panel data for the period 1984-2012 are used, and the generalized method of moment (GMM) technique is implemented. Findings – The results support the agglomeration effect, which indicates that countries which have already had FDI attract more FDI in the future. Economic risk affects FDI significantly and negatively, whereas trade openness has a significant and positive impact on FDI. Of the political risk factors considered, three of them, namely, law and order, ethnic tension and internal conflict, significantly affect FDI. The results on FPI show that the lag in FPI and the degree of openness play a significant role in attracting FPI into the MENA region. In addition, stock market capitalization, as well as the return on investment affects the FPI flow positively. The study also reveals a negative government structure impact on FPI, whereas, surprisingly, religious tension in the MENA region affects FPI positively. Originality/value – This research examines, simultaneously, the factors that determine not only FDI but also FPI flow. It uses a powerful econometric technique which avoids common estimation problems such as endogeneity, heteroskedasticity and autocorrelation. Policymakers in the MENA region recognized the need for outside capital as a major catalyst of development, economic growth and modernization. Therefore, it is essential to know the factors that would lead to a surge in capital flow to these countries.