International Journal of Emerging Markets

The determinants of foreign direct investment in the Middle East North Africa region
Tim Rogmans, Haico Ebbers,
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IJOEM
8,3 The determinants of
foreign direct investment in the
Middle East North Africa region
240
Tim Rogmans
Zayed University, Dubai, United Arab Emirates, and
Haico Ebbers
Nyenrode University, Breukelen, The Netherlands
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Abstract
Purpose The purpose of this paper is to test the determinants of foreign direct investment (FDI)
into countries of the Middle East North Africa (MENA) region.
Design/methodology/approach The research is based on an econometric model that includes
factors that potentially drive FDI flows into countries in the MENA region.
Findings Energy endowments have a negative impact on FDI flows into a country. GDP per capita,
openness to trade and oil prices have a positive impact on FDI inflows, while aggregate measures of
environmental risk are not a differentiating factor among countries in the region.
Originality/value This paper demonstrates that the Dutch disease concept applies to FDI in
resource rich countries in the MENA region. Countries with large amounts of oil and gas have are more
likely to have policies and institutions that inhibit FDI. Countries that value the spillover effects from
FDI need to reconsider legislative and institutional hurdles that remain.
Keywords Emerging markets, Middle East, North Africa, International investments, Natural resources,
Foreign direct investment, Institutions, Political risk
Paper type Research paper

1. Introduction
Foreign direct investment (FDI) is generally considered as desirable for host countries,
especially in emerging markets. Following the Asian debt crisis of 1997, FDI is seen as a
more stable source of capital than portfolio investment (Lipsey, 2001). FDI is also said to
have important spillover effects, such as transfer of technology and managerial expertise
(Meyer and Sinani, 2009; Lipsey, 2001). Hence, many emerging economies, including those
in the Middle East North Africa (MENA) region, have been taking steps to encourage FDI.
The question as to what are the determinants of FDI flows is therefore an important
one for policymakers and academics alike. A number of studies have considered either
the impact of individual elements on FDI flows (Globerman and Shapiro, 2002;
Benassy-Quere et al., 2007) or have attempted to construct an overall model of the
determinants of FDI flows (Jun and Singh, 1995; Chakrabarti, 2001; Sethi et al., 2003).
Emerging or transition economies have received particular attention in this area, given
the importance of FDI in their development ( Jun and Singh, 1995; Nunnenkamp, 2002;
International Journal of Emerging Bevan and Estrin, 2002). Still today, the evidence on the determinants of FDI flows into
Markets emerging market economies is mixed and incomplete, particularly as the relationships
Vol. 8 No. 3, 2013
pp. 240-257 between FDI, natural resource endowments and the more traditional FDI determinants
q Emerald Group Publishing Limited found in the literature are concerned. Among emerging markets, the MENA region has
1746-8809
DOI 10.1108/17468801311330310 received very little attention in the academic literature.
 This study builds a model of the determinants of FDI inflows into the MENA region. FDI in the
It contributes to the existing literature by testing some of the traditional determinants of MENA region
FDI in the MENA region and by examining the role of a countrys of oil and gas resources
and world energy prices in determining FDI flows. The study finds that some of the
traditional determinants of FDI such as market size and openness to trade, as well as
world energy prices, are significant in the MENA region. However, an aggregate
measure of environmental risk and the energy reserves of a country have an 241
insignificant and negative association with FDI, respectively.
The remainder of this paper is organised as follows. Section 2 gives an overview of
the prevailing theories on FDI. Section 3 provides a profile and some relevant descriptive
statistics of the MENA region. Section 4 summaries the existing research on the
main specific determinants of FDI flows and develops the hypotheses that are tested in
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the study. Sections 5 and 6 describe the research methodology and results. Section 7
summarizes the papers main conclusions and implications.

2. FDI theory
The study of FDIs has its roots in transactions costs approach originally developed by
Coase (1937) who argued that the boundaries of the firm are determined by the relative
costs of carrying out a transaction within a firms hierarchy or on the open market.
This perspective has subsequently been applied to the question of international
production by Hymer (1960) who investigated why firms carry out activities outside
their home countries themselves rather than through arms length agreements.
Williamson (1979) extended this approach, stating that firms establish operations
abroad (i.e. use the hierarchy rather than the market mechanism) because of the potential
for opportunism between contracting parties. This potential opportunism brings with it
significant costs of negotiating contracts, monitoring compliance, resolving disputes
and potentially renegotiating if a contract needs to be changed. Therefore, if these
transaction costs are high, firms are more likely to engage in FDI to leverage their
resources or ownership advantages. The transaction cost approach has been developed
further by, amongst others, Buckley and Casson (1976), Hennart (1982, 1986) and
Anderson and Gatignon (1986, 1988).
Taking a broader perspective, the eclectic paradigm of international production
developed by Dunning (1977) states that firms will engage in FDI if there are ownership,
location and internalization advantages in doing so. Research into the determinants of
FDI into specific countries deals with location factors. In one of the first studies of this
type, Dunning (1980) tested for a number of location advantages, concluding that market
size, wages differentials and tariffs were the main location factors driving US FDI into a
sample of seven countries. Since then, a number of studies have considered the
determinants of FDI within the framework of a countrys location advantages.
Research into FDI location factors has typically been based on panel data ( Jun and
Singh, 1995; Chan and Gemayel, 2004) or on questionnaire based surveys (Galan et al.,
2007; Slangen and Beugelsdijk, 2010). The various studies have subsequently been
consolidated in theoretical contributions such as those by Dunning and Lundan (2008)
and Buckley and Ghauri (2004). Research on FDI determinants that has been published
in the four main international business journals (Ellis and Zhan, 2011) or research related
specifically on the MENA region is listed in Appendix. Although there is conflicting
evidence in some cases, there is a general picture that emerges from the work done to date
 IJOEM regarding several determinants of FDI inflows, including market size, openness to trade,
8,3 export orientation and environmental risk factors. These factors will be discussed
further in Section 4.

3. The MENA region

There are different possible definitions of the MENA region, depending on the approach
242 taken, the MENA region is comprised of the following 16 countries: Algeria, Bahrain,
Egypt, Iran, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia,
Syria, Tunisia, United Arab Emirates, Yemen. A summary of descriptive statistics on
the countries in the region is provided in Table I.
FDI into the MENA region has been at relatively low levels until recently. Whereas
during the 1980s and 1990s the MENA countries accounted for only around 1 percent
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of global inward FDI flows, this proportion has been rising steadily since 2000 and has
grown to 3.8 percent in 2005 and 5.7 percent in 2008 (UNCTAD, World Investment
Report, 2009). Several governments have been encouraging FDI as a way of developing
and diversifying their economies, notably Egypt, Saudi Arabia and the UAE. Despite
recent growth, the MENA regions share of global FDI flows has remained consistently
lower than the regions share of the global economy.
Countries in the MENA region do have some commonalities in terms of language,
culture, history, business practices and governance systems. However, in terms of
economic profile there is one overriding difference between MENA countries in terms of
countries oil and gas resources. For this study, the region in scope contains seven OPEC
members and nine non-OPEC members. OPEC members obtain at least 25 percent of their
GDP from oil and gas revenues and have large proven oil reserves which will last over
85 years at current production rates (BP, 2009). Although several non-OPEC members
such as Bahrain, Egypt, Oman, Syria and Yemen also have some oil reserves, these are
much smaller and are forecast to run out within the next 15 years. The other countries in
the sample (Jordan, Lebanon, Morocco, Tunisia) have no proven reserves of oil and gas

Popn GDP GDP per capita FDI inflow FDI stock OPEC WTO
Country (m) (US$ m) (US$) (US$ m) (US$ m) (Y/N) (year joined)

Algeria 34.4 166,545 4,845 2,646 14,458 Yes No

Bahrain 0.8 21,903 28,240 1,794 14,844 No 1995
Egypt 81.5 162,283 1,991 9,495 59,998 No 1995
Iran 71.0 286,058 4,028 1,492 20,811 Yes No
Jordan 5.9 21,238 3,596 1,954 18,012 No 2000
Kuwait 2.7 148,024 54,260 56 991 Yes 1995
Lebanon 4.2 29,264 6,978 3,606 24,170 No No
Lybia 6.3 93,168 14,802 4,111 12,834 Yes No
Morocco 32.1 88,883 2,769 2,388 41,001 No 1995
Oman 2.7 41,638 15,273 2,928 11,993 No 2000
Qatar 1.1 71,041 62,451 6,700 22,055 Yes 1996
Saudi Arabia 24.6 468,800 19,022 38,223 114,277 Yes 2005
Syria 20.6 55,204 2,682 2,116 10,337 No No
Tunisia 10.3 40,309 3,903 2,761 29,083 No 1995
Table I. UAE 4.4 198,693 45,531 13,700 69,420 Yes 1996
MENA country overview Yemen 22.9 26,576 1,160 463 3,305 No No
 that are currently being exploited. Because MENA countries display such a variety of oil FDI in the
and gas endowments and possess very little other exportable natural resources (Richards MENA region
and Waterbury, 2008), the region is a fruitful ground for testing the impact of natural
resource endowments on FDI inflows, with oil and gas resources serving as a relatively
accurate measure of a countrys total natural resource endowment.
Few studies on FDI deal specifically with the MENA region. Moosa (2002) concluded
that FDI into the Middle East can be explained in terms of GDP growth rate, enrolment in 243
tertiary education, spending on research and development, country risk and domestic
investment. Alessandrini (2000) investigated the legal and regulatory framework of FDI in
the MENA region and describes linkages with inward FDI. He notes that countries that
have attracted significant FDI (Morocco, Tunisia, Turkey) have done so despite legal
restrictions to FDI in specific sectors. Chan and Gemayel (2004) analyzed the role of risk and
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risk instability on FDI inflows. They concluded that the stability of risk, rather than the
absolute risk level, is associated with high FDI flows in the MENA region. After comparing
the role of risk in MENA countries to a set of developed economies, they also concluded that
the role of risk in attracting FDI is greater in developing nations than in developed nations.
So far, no study has incorporated the role of petroleum resource endowments in an
overall model of FDI inflows into the MENA region. In this context, Estrin and Meyer
(2004) state:
Recently, empirical studies have begun to analyze entry modes in emerging markets such as
Eastern Europe and China. Other emerging markets remain under-researched. Moreover,
most studies pay only scant attention to local resource endowment and institutional
peculiarities, as few have systematically explored the institutional variations between and
within emerging markets and their impact on FDI.

4. Determinants of FDI flows

In terms of determinants of overall FDI flows into a country, existing research has
concentrated on factors related to market size, a countrys openness to trade, political
risk and business operating conditions. A listing of research on the determinants of FDI
flows is provided in Appendix. In this section, each of the main variables associated with
FDI inflows in the literature is discussed and testable hypotheses for the MENA region
are developed.

(i) Market size

The least controversial factor associated with FDI inflows is a countrys market size,
usually measured by a countrys GDP (Estrin and Bevan, 2004; Chakrabarti, 2001;
Dunning, 1980). Other measures of market size or market attractiveness can have a more
ambiguous impact. High levels of per capita GDP indicate markets with high spending
power and this can be expected to increase market seeking FDI. However, for efficiency
seeking FDI, high per capita GDP is typically associated with high wage rates, making
the country less attractive for investments in, for example, export oriented
manufacturing industries. For the MENA region, the available evidence suggests that
market seeking FDI is more prevalent than efficiency seeking FDI and therefore it is
expected that GDP and GDP per capita are determinants of FDI inflows:
H1a. FDI inflows in the MENA region are positively associated with a countrys
market attractiveness.
 IJOEM (ii) Openness to trade
8,3 Openness to trade is expected to be associated with high FDI if foreign investment
leads to the production of goods and services for export. However, there is also a
contrary argument that says that tariff barriers may encourage tariff-hopping FDI.
In the academic literature, openness to trade is generally found to be associated with
high FDI inflows, although the direction of causality remains undetermined. Jun and
244 Singh (1995) found that export orientation was the single most important determinant
in FDI flows to a set of 31 developing countries and especially so among a subset of
high FDI countries. By conducting Granger causality tests, they concluded that there is
likely to be a dynamic and simultaneous relationship between exports and FDI, but
that on the whole they found support for the notion that exports precede FDI:
H2. FDI inflows are positively associated with a countrys manufacturing exports.
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(iii) Environmental risk

Environmental risk in the context of FDI can be defined as the unpredictability of an
entrants external environment (Anderson and Gatignon, 1988) and is sometimes also
referred to as external risk or country risk. Agarwal and Ramaswami (1992) use the term
external risk and define it as the uncertainty over the continuation of present economic
and political conditions and government policies which are critical for the survival and
profitability of a firms operations in that country. Political risk is generally regarded as
an important component of environmental risk. Root (1994) states that a countrys
political risk arises from:
[. . .] uncertainty over the continuation of present political conditions and government policies
in the foreign host country that are critical to the profitability of an actual or proposed
equity/contractual business arrangement.
Root distinguishes four main types of political risks to be evaluated by investors:
general instability, expropriation risk, operations risk and transfer risk. The concept of
environmental risk is closely related to that of institutional stability and business
operating conditions. As countries develop stable and effective institutions, political
change is less likely to have a significant impact on business operating conditions.
Generally, one would expect relatively high levels of environmental risk and
institutional instability to deter foreign investment. If risk is high, investors require a
higher return for their project as compensation for the risk they assume. Hence, certain
investment projects will be attractive in one country but not in another, higher risk,
country. We would expect this reasoning also to be reflected in FDI statistics, where high
risk countries would, ceteris paribus, receive relatively less FDI.
As national economies become increasingly interconnected, the interest in
environmental risk analysis among corporations, rating agencies and academics has
grown. Today, a large number of risk ratings are available, considering a countrys
environmental risk from different perspectives. The major country risk rating agencies
focus on credit risk (e.g. Euromoney, Institutional Investor, Standard and Poors),
corruption (e.g. Transparency International), economic freedom (e.g. Freedom House,
Heritage Foundation) or overall risk (e.g. Global Insight and the Political Risk Groups
ICRG). The World Bank also publishes a set of governance indicators (Kaufmann et al.,
2007) which consists of an amalgamation of a number of measures published by
different sources.
 Risk scores have been used to analyze the relationship between risk and FDI from FDI in the
various angles. Jun and Singh (1995) studied the determinants of FDI in developing MENA region
countries in a broad sense and the role of sociopolitical instability in particular. They
carried out regression analyses to test the relationship between FDI inflows relative to
GDP and relative to a measure of sociopolitical instability and found a significant
relationship between risk and FDI inflows, particularly for a group of countries
attracting high FDI inflows. 245
In several studies, risk has been measured in terms of the International Country Risk
Guide (ICRG) ratings published by the Political Risk Group. For example, Busse and
Hefeker (2005) test for 12 different indicators for political risk in developing countries and
found that government stability, the absence of internal conflict and ethnic tensions,
basic democratic rights and ensuring law and order are highly significant determinants
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of FDI inflows. However, they did not find a significant relationship between FDI flows
and the other elements of risk they tested for, such as investment profile, corruption, the
role of the military in politics, bureaucracy quality. Chan and Gemayel (2004) also use
ICRG data in the aforementioned study on FDI in the MENA region.
Globerman and Shapiro (2002) found that a good governance infrastructure attracts
capital, especially in smaller and developing economies. Anderson and Gatignon (1988)
split a sample of countries into low risk and high risk countries and found that
variations in uncertainty are particularly relevant for FDI into high risk countries.
Benassy-Quere et al. (2007) concluded that institutional factors such as transparency,
lack of corruption and efficiency of justice are significant determinants of FDI.
In a recent study, Slangen and Beugelsdijk (2010) found that institutional hazards
are negatively associated with foreign activity of MNEs, especially in the case of
vertical foreign activity where interlinked affiliates first extract resources which are
then processed and sold elsewhere. This is in contrast to horizontal FDI which is more
likely to be market seeking. Failure in horizontal FDI does not usually have an impact
on the investor beyond the country in which the investment has been made and
tolerance for environmental risk in these types of investment is therefore higher. They
used The World Bank governance indicators produced by Kaufmann et al. (2007) for
their analysis.
Therefore, despite some variations depending on specific characteristics of
individual studies, existing research indicates that a high level of environmental risk in
a country leads to lower FDI inflows, especially among developing countries and
countries with high risk levels:
H3. FDI inflows in the MENA region are negatively associated with a countrys
level of political risk.

(iv) Natural resource endowments

Natural resource endowments such as oil and gas are generally believed to be attracting
resource seeking FDI (Estrin and Meyer, 2004; Dunning, 1988) but they have not been the
subject of empirical research, except for Mina (2007). Dunning and Lundan (2008)
mentions availability of natural resources as one of the possible location determinants
for resource seeking FDI. Clearly, the availability of such resources is a necessary but not
sufficient condition for natural resource seeking FDI, as Dunning acknowledges by
listing infrastructure, government restrictions on FDI and investment incentives as
other relevant location factors.
 IJOEM Although it is beyond dispute that natural resources are by definition required for
8,3 natural resource seeking FDI, there is a counter argument to the notion that natural
resources attract FDI. The Dutch disease theory was first put forward by The Economist
(1977) and subsequently tested by Corden and Neary (1982). The theory of the Dutch
disease predicts that a countrys manufacturing sector declines as a result of a sudden
increase in revenues from oil and gas (as a result of either a major find or a price spike). The
246 manufacturing sector decline occurs because earnings from energy exports push up a
countrys real exchange rate, thereby making local manufacturing activity uncompetitive,
both domestically and in international markets. Following the development of the economic
model underlying this phenomenon by Corden and Neary (1982), the term Dutch disease
has sometimes been used in any context where a big increase in foreign earnings from
sources such as natural resources or foreign aid affect a countrys competitiveness.
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There is a feasible but untested argument that the Dutch disease concept applies
also to the role of natural resource endowments in attracting FDI: as a country earns
foreign exchange reserves through exports of natural resources, its real exchange rate
goes up, making FDI relatively expensive for foreign investors. Even in MENA
countries with exchange rates that are pegged to the US dollar, it can be argued that oil
revenues sustain the currency at the pegged level.
Moreover, since in the MENA region the energy reserves are typically controlled by
state owned entities, the revenues earned from energy exports can be invested
domestically by the government for the purpose of economic diversification. Economic
development, therefore, does not require the financial resources of international
investors and countries rich in natural resources have no financial incentive to encourage
FDI. The validity of this argument is supported by the data available regarding
restrictions on foreign ownership in the MENA region (Lopez-Carlos and Schwab, 2005,
2007)[1], which are reported to be much higher among OPEC countries than non-OPEC
countries. Most likely as a result of this government policy to restrict foreign ownership,
OPEC countries have received less FDI than non-OPEC countries. Over the 1987-2008
period as a whole, the OPEC member states had a ratio of FDI to GDP of 1.6 percent
compared to a ratio of 3.5 percent for non-OPEC member states. Therefore, it is
hypothesized that the Dutch disease or resource curse does apply to FDI and that in
the MENA region a countrys energy endowment is negatively related to its FDI inflows:
H4. FDI inflows are negatively associated with a countrys endowment of energy
resources.
In addition to the actual resource endowment of a country, FDI flows can also be affected by
the world market prices for these resources. To date, there appears to be no academic study
that investigates the impact of oil prices on FDI. Fluctuations in oil prices can potentially
impact FDI flows in two ways. First, higher oil prices make marginal investments in oil and
gas exploration more attractive, thereby potentially increasing FDI inflows if these
investments are carried out by foreign investors. Second, higher oil prices increase the
revenues of the governments of oil producing countries. Given that significant oil
producing countries typically run budget surpluses, these additional oil revenues are then
available for direct investment by government investment agencies (such as Sovereign
Wealth Funds), be it locally, regionally or outside the MENA region. If the impact described
does exist, it is likely to be a lagged effect, since the effect of higher oil prices needs some
time to work its way through to higher government revenues and higher FDI:
 H5. FDI inflows in the MENA region are positively associated with a world FDI in the
energy prices during previous year. MENA region
5. Research methodology
This paper is based on panel data, analysing the flows of FDI into 16 MENA countries
during the 1987-2008 period. In order to test the hypotheses, a multiple ordinary least
squared regression model is built that includes the main parameters that are expected 247
to be associated with FDI inflows, as outlined in the hypotheses above.
As the dependent variable, FDI flows are used in line with most other research on
the topic. Given the relative stickiness of direct investments, FDI flows are more
sensitive to changes in a locations characteristics than FDI stocks. The data on FDI
flows is obtained from the relevant UNCTAD World Investment Reports. Given the
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overwhelming evidence and strong logic that exist for the role of GDP in explaining
FDI inflows (Dunning, 1980; Estrin and Bevan, 2004; Chakrabarti, 2001), FDI flows are
expressed as a proportion of a countrys GDP. In this way, the focus of the model is on
the determinants of a countrys FDI inflows after taking account of the size of the
countrys economy. In order to correspond to the available data on the independent
variables, annual data for the 22-year period between 1987 and 2008 are used for the
16 MENA countries that are part of the country sample.
The independent variables included in the model are designed to test the individual
hypotheses and to give a comprehensive understanding of the drivers of FDI flows into
the MENA region while keeping the overall number of explanatory variables small
enough to be able to manage issues of multicollinearity.
Market attractiveness is measured by GDP per capita, based on the premise that
markets with affluent consumers are more attractive for market seeking FDI. As
stated, there may be a reverse impact of GDP per capita on efficiency seeking FDI since
high GDP per capita implies high wage rates, although this does of course, also depend
on the distribution of income within a country.
Openness to trade is measured by a countrys manufacturing exports as a
percentage of GDP. Countries that are successful in exporting may also be successful in
attracting foreign manufacturers that aim to export their products. In this study, only
the strength of the relationship between openness to trade and FDI will be tested, not
the direction of causality.
As a measure of environmental risk, the composite risk rating score is used from the
ICRG published by the Political Risk Group (PRS). ICRG measures are used by a number
of other studies in the field (Henisz, 2000; Chan and Gemayel, 2004; Calhoun, 2005; Busse
and Hefeker, 2005) and are available for an extended period of time in a consistent manner.
The ICRG composite risk rating is designed to measure the overall environmental risk of a
country in a way that is comparable with other countries and over time. The components
of the rating include various political, economic and financial risk elements.
A countrys natural resource endowment is measured by a countrys total oil and gas
reserves. Oil reserves are measured in billions of barrels of proven reserves and gas
reserves are measured in cubic meters (BP, 2009). In order to arrive at one aggregate
measure of a countrys energy endowment, gas reserves are then transformed into
equivalent oil reserves using the industry standard conversion ratio of 5.89 barrels of oil
per 1,000 m3 of gas. Oil prices are measured by the world oil price at the start of a year
(BP, 2009). The impact that is tested is of a one-year lagged effect of oil prices on FDI.
 IJOEM With these parameters as independent variables, it is expected that the most relevant
8,3 factors have been included in the model while managing the risk of multicollinearity.
Among other factors that appear in the published literature, education (sometimes also
measured as availability of skilled labor) and infrastructure are not included in the
model. For both factors it has not been possible to identify relevant time series data in a
consistent way for countries across the region.
248 Table II shows a correlation matrix between the dependent and independent
variables for all countries for the period 1987-2008, as well as for the variables FDI and
GDP separately. From Table II, it can be observed that the dependent variable
(FDI/GDP) is positively correlated with all the independent variables in the model.
Among the independent variables in the model, the highest correlation is that of 0.435
between GDP per capita and composite risk, which is significant at the 1 percent level.
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Although the correlation coefficients do not appear very high, tests for multicollinearity
between the dependent variables will be carried out.
Several robustness checks are carried out. Given the different economic profiles of
OPEC and non-OPEC countries, the regressions are run for all countries as well as for the
groups of OPEC and non-OPEC countries separately in order to determine if there are
differences in the determinants of FDI inflows depending on a countrys endowment of
oil and gas resources. Such analysis is in line with Jun and Singh (1995) who split their
country sample between recipients of high and low FDI flows to determine the
underlying drivers for countries with very different profiles. In addition, the sample is
split into two equal time periods (1987-1997 and 1998-2008) to ascertain whether the
determinants of FDI inflows are changing over time. As a final robustness check, the
model is run using environmental risk scores from Global Insight. These ratings are
defined in a similar way as the ICRG ratings, but are available for a shorter time period
only (1997-2005).
Therefore, a total of six regression models are produced as follows:
.
Model 1. All MENA countries, all years (1987-2008), ICRG risk data.
.
Model 2. OPEC countries, all years (1987-2008), ICRG risk data.
.
Model 3. Non-OPEC countries, all years (1987-2008), ICRG risk data.

GDP Manuf. Oil and

per exports/ Composite gas Oil
FDI GDP FDI/GDP capita GDP risk reserves price

FDI 1
GDP 0.625 * * 1
FDI/GDP 0.363 * * 20.027 1
GDP per
capita 0.237 * * 0.179 * * 0.123 * 1
Manufacturing
exports/GDP 0.210 * * 20.055 0.281 * * 0.154 * * 1
Composite risk 0.261 * * 0.237 * * 0.160 * * 0.435 * * 0.277 * * 1
Oil and gas
Table II. reserves 0.211 * * 0.738 * * 20.193 * * 0.340 * * 20.124 * 0.188 * * 1
Bivariate correlation Oil price 0.509 * * 0.373 * * 0.380 * * 0.282 * * 0.177 * * 0.374 * * 0.069 1
coefficients of model
variables Note: Correlation is significant at: *5 and * *1 percent levels (two-tailed)
 .
Model 4. All MENA countries, early years (1987-1997), ICRG risk data. FDI in the
.
Model 5. All MENA countries, recent years (1998-2008), ICRG risk data. MENA region
.
Model 6. All MENA countries, all years (1987-2008), Global Insight risk data.

6. Results
The results of the regressions are shown in Table III.
Considering first the model for all MENA countries for all years (1987-2008), three of
249
the parameters in the model are significant and two are not. Manufacturing exports as
a share of GDP and oil prices are positively associated with FDI, whereas a countrys
oil and gas reserves are significant and negatively associated with FDI. The variables
GDP per capita and composite risk are both found to be not significantly associated
with FDI performance.
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The overall R 2 values range from 21.6 percent (model 1) to 54.6 percent (model 2).
This relatively low value of R 2 is a direct result of choosing FDI/GDP as the dependent
variable. The model aims to explain the part of FDI inflows into a country that is not
already explained by the size of a countrys economy, as measured by GDP. If the model
had used FDI as its dependent variable and included GDP among the independent
variables, clearly the R 2 values would have been much higher.
When the sample is split between OPEC and non-OPEC countries (models 2 and 3),
there are some similarities and differences compared to the overall MENA model. In
line with the overall model, the role of oil prices in determining FDI flows is significant
and positive in both OPEC and non-OPEC countries. Similarly, the role of the
composite risk measure is not significant in both sub-samples of OPEC and non-OPEC
countries. Contrary to the overall model, GDP per capita is found to be significantly
associated with FDI performance in both of the sub-samples. This finding indicates
that GDP per capita is associated with FDI performance within the group of OPEC
countries and within non-OPEC countries but not across OPEC and non-OPEC
countries in the MENA region. The role of manufacturing exports is found to be
positive only in OPEC countries. The role of oil and gas reserves is not significant
within the group of OPEC countries and significant and negative among non-OPEC
countries.
When we compare the results of the first 11 years (1987-1997) to the second 11-year
(1998-2008) period (models 4 and 5), the model is more robust for the later period, as
demonstrated by the significance of the individual parameters and the much high R 2
values. In the earlier period, only a countrys oil and gas reserves are significant and
negatively associated with FDI performance. In the later period, all variables are
significant, with the parameters GDP per capita, manufacturing exports and oil price
having a positive sign and composite risk and oil and gas reserves with a negative
sign.
Model 6 displays the results using Global Insight as the data source for the
environmental risk score. Since Global Insight data is only available for the 1997-2005
period, the results are most comparable to model 5 which is based on ICRG risk data
for the 1997-2008 period. The results based on ICRG and Global Insight data are very
similar, keeping in mind that for ICRG a high risk score means relatively little risk,
whereas for Global Insight a high risk score indicates high risk. Surprisingly, for the
later period, using either ICRG or Global Insight data, high levels of environmental risk
are associated with thigh levels of FDI inflows.
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8,3

250
IJOEM

Table III.
Regression results
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Constant 20.526 (0.660) 20.873 (0.214) 20.69 (0.971) 21.552 (0.613) 10.660 (0.000) * * 2 4.076 (0.040) *
GDP per capita 0.000 (0.231) 0.000 (0.005) * * 0.000 (0.001) * * 0.000 (0.522) 0.000 (0.008) * * 0.000 (0.010) *
Manufacturing exports 0.088 (0.002) * * 0.098 (0.000) * * 0.019 (0.701) 0.022 (0.691) 0.139 (0.000) * * 0.0134 (0.000) * *
Composite risk 0.000 (0.995) 20.007 (0.536) 20.004 (0.894) 0.039 (0.152) 20.171 (0.000) * * 1.398 (0.021) *
Oil and gas reserves 20.010 (0.000) * * 20.001 (0.362) 20.231 (0.012) * 20.010 (0.013) * 20.009 (0.001) * * 2 0.011 (0.000) * *
Oil price 0.095 (0.000) * * 0.057 (0.000) * * 0.115 (0.000) * * 0.037 (0.778) 0.108 (0.000) * * 0.054 (0.011) *
Adjusted R 2 0.216 0.546 0.236 0.029 0.401 0.227
Observations 323 138 184 163 159 143
Note: Significant at: *5 and * *1 percent levels
 Tests point out that the model does not suffer from multicollinearity issues. For each FDI in the
regression, multicollinearity statistics have been obtained and the variance inflation MENA region
factor (VIF) is below 4 for all regressions, whereas typically only VIF values over 5 or
10 give concern for multicollinearity in the model.

7. Discussion
The results yield several insights into the determinants of FDI in the MENA region. 251
First, a countrys oil and gas reserves are negatively associated with its FDI
performance. This finding is in contrast to the hypothesis of Dunning (1980) that natural
resources attract resource seeking FDI. The negative association between a countrys
endowment of energy reserves is significant for both the overall country sample and for
non-OPEC countries in particular and the negative relationship has grown stronger over
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time. However, within the group of OPEC countries, differences in energy endowments
no longer help to explain differences in FDI performance.
This important finding can be seen as a variant of the Dutch disease or resource
curse. Since foreign investors are unlikely to be deterred by the presence of oil and gas
reserves in a country per se, the question that remains to be answered is how, or through
what channel, energy endowments lead to relatively low levels of foreign investment.
A potential explanation is to be found in the fact that countries with large reserves of oil
and gas have enough financial resources and foreign currency available to finance their
own economic development. Such countries may view that any expertise required to
exploit the natural resources can be purchased through licensing and contractual
arrangements, rather than by sharing ownership of the investments made to exploit
natural resources. Since FDI is sometimes associated with a loss of economic sovereignty,
particularly in undiversified economies, oil rich countries have typically not actively
encouraged FDI and have stipulated local ownership requirements in many, if not all,
industry sectors (Lopez-Carlos and Schwab, 2005, 2007). This potential explanation is
difficult to test for the entire MENA region for the period under study (1987-2008), since
data on FDI restrictions such as the OECD FDI restrictiveness index are not available for
MENA countries. The only dataset available data for a significant group of MENA
countries is from the World Economic Forums Arab World Competitiveness Report
(2005, 2007), referred to in Section 4. OPEC countries are perceived to have much higher
restrictions on foreign ownership than non-OPEC countries. Furthermore, the correlation
coefficient between openness as reported by the World Economic Forum (2005, 2007) and
the average FDI performance[2] for a country for the period 2005-2007 is 0.674, indicating
a strong correlation between a countrys openness to FDI and FDI performance. Although
the data is not complete and only relates to recent years, this analysis does provide strong
support for the notion that oil producing countries receive less FDI at least partly as a
result of policy choices related to the openness of their economies to FDI.
Only recently have some OPEC members started to encourage FDI, notably
Saudi Arabia and the UAE. These efforts have met with significant success, making
these two countries the top two FDI recipients in the MENA region since 2006. The UAE
is already a large recipient of FDI since 2001, whereas Saudi Arabias FDI inflows have
grown strongly after its entry into the World Trade Organization in 2005. Other OPEC
members in the region are still among the bottom performers in the region in terms of
attracting FDI (e.g. Kuwait, Algeria, Iran) or have started to attract more investment
only very recently (e.g. Qatar, Lybia) after a long period of very low FDI inflows.
 IJOEM With respect to the other independent variables, the role of GDP per capita, is not
8,3 significant when considering the full country sample, but is significant when
considering the individual sub-samples of OPEC and non-OPEC countries. This finding
provides further support to the role of market seeking as a motive for FDI in the MENA
region, with investors seeking out markets with wealthy consumers within the groups of
OPEC and non-OPEC countries.
252 The role of manufacturing exports is positive and significant in the total country
sample and the OPEC country sub-sample. The question of causality remains; do
manufacturing exports promote FDI inflows or vice versa? Jun and Singh (1995)
arrived at a similarly robust result for export orientation and conducted a Granger
causality test, concluding that for some countries in their sample exports preceded FDI,
for one country FDI preceded exports and for other countries the results were
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inconclusive. This study does not further investigate the causality question regarding
manufacturing exports and FDI and does not come to conclusions in this regard other
than demonstrating that the two variables are positively associated with each other.
The lack of significance of environmental risk, as measured by either the ICRG
composite risk or the Global Insight Overall, risk rating, is somewhat surprising. There
is even a significant negative association between risk and FDI performance for the later
period. Existing theory suggests that investors are attracted by government stability
and a strong investment profile. However, the results do not support this hypothesis.
There are three possible, complementary, explanations for this result. First, it is possible
that investors are not greatly concerned about overall risk levels in a country, provided
that they are adequately protected or are compensated for taking the risk. Second,
investors may not be concerned about environmental risk as long as it is below a certain
threshold level. Although environmental risk is generally high in the MENA region, it
can be argued that once a company has decided to enter the MENA region at all, nearly
all countries are potential markets to operate in. Third, it is possible that investors are
sensitive to particular aspects of environmental risk rather than the overall level.
The level of world oil prices is a significant determinant of FDI performance
throughout the region. There are two potential and complementary explanations for
this finding. For oil producing countries (both OPEC and non-OPEC), higher oil prices
make marginal investments in oil exploration and extraction attractive and such
investments may at least partly be realised through FDI. Second, higher oil prices
directly affect the revenues of OPEC country governments. The additional revenues
typically result in budget surpluses which are in turn partly reinvested in neighboring
countries (both OPEC and non-OPEC), for example through Sovereign Wealth Funds
or other government controlled investment vehicles.

8. Conclusions
The MENA region is potentially unique in the world in that it contains countries with
many similarities, but one overriding difference between countries in terms of energy
endowments. This, together with the absence of other significant natural resource
endowments and the presence of high levels of environmental risk, makes the MENA
region highly appropriate for testing the role of natural resource endowments and
other, more traditional, factors in determining FDI inflows. As a result, this study has
confirmed some of the traditional determinants of FDI flows found in the literature and
has obtained new findings.
 The role of GDP per capita and manufacturing exports in determining FDI flows is FDI in the
positive, as existing theory would suggest. In contrast to most of the available MENA region
literature, the role of environmental risk is not significant or is even positive (i.e. high
levels of risk are associated with high levels of FDI). This may be because investors are
not concerned about aggregate measures of environmental risk but rather worry about
specific risk factors that are relevant to them.
Oil and gas reserves have a negative impact on FDI inflows. Judging from the various 253
restrictions on foreign ownership placed by OPEC members, the relatively poor inward
FDI performance among countries that are rich in energy resources is most likely the
result of policy decisions. Although several OPEC members have been successful at
attracting FDI since 2001, other OPEC countries have not. Countries that believe that the
benefits from FDI in terms of the various spillover effects and job creation outweigh the
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concerns regarding economic sovereignty, would do well to accelerate their efforts to

encourage foreign investment, even if such countries may already have ample foreign
exchange reserves.
The role of the world oil price on FDI inflows is shown to be positive in both OPEC
and non-OPEC countries. A likely explanation is that as neighboring countries
accumulate foreign exchange reserves, at least a part of these reserves find their way
as FDI within the region.
In terms of implications for future research, this study has produced two testable
propositions for which evidence is provided for the MENA region. The first testable
proposition is that large endowments of natural resources are associated with
relatively low FDI inflows as a result of policy decisions that discourage FDI among
resource rich countries. This proposition in particular warrants further research to see
if the phenomenon of Dutch disease, i.e. negative economic consequences associated
with natural resource endowments, can be extended for FDI to regions other than the
MENA region.
The second proposition is that an increase in the world price for a commodity has a
positive impact on FDI into countries that are in the same region as the resource rich
countries. The propositions can be tested for energy resources as well as for other
natural resources which may be significant in different geographies.
The study has several limitations. First, by not including variables relating to
education, quality of the workforce and infrastructure (as a result of limitations on data
availability), potentially significant variables are excluded from the model. Second, the
measure for environmental risk is at a high level of aggregation. Future research may
look further into different types of environmental risk and how these affect FDI flows.
Third, the study is at a macro (country) level, which by definition entails certain
restrictions. Due to data availability issues, the study does not differentiate between
different sectors of the economy and does not address the country of origin of FDI
flows. Finally, as a macro level study, the actual decision making process that
companies engage in when making FDI decisions is not taken into account. Some of
these limitations could be addressed by survey based research or case studies.

Notes
1. Of the 14 countries rated by the World Economic Forum, the seven countries with the
highest perceived level of openness to FDI are all non OPEC members, while the six OPEC
countries in the sample are among the bottom seven countries in terms of openness.
 IJOEM 2. Defined as the share of countrys FDI of global FDI divided by the share of a countrys GDP
in global GDP. A FDI performance score of more than 1 indicates the countrys receives more
8,3 FDI than the size of its economy would suggest.

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Corresponding author
Tim Rogmans can be contacted at: tim.rogmans@zu.ac.ae

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Appendix

Publication Geographic scope Significant determinants of FDI flows

Benassy-Quere et al. FDI from OECD countries Bureaucracy, corruption, information, banking sector, legal institutions, capital
(2007) concentration, employment protection
Bevan and Estrin Central and Eastern Europe Risk, unit labor cost, host market size
(2002)
Busse and Hefeker 83 developing countries Government stability, law and order, bureaucracy quality
(2005)
Chakrabarti (2001) MENA Market size, tax, wage, openness, exchange rate, tariff, growth, trade balance
Chan and Gemayel MENA Stability in investment risk
(2004)
Dunning (1980) FDI by US firms in seven Market size, tariffs, wages
countries
Galan et al. (2007) Spanish MNEs in Latin America Europe: infrastructure, technological factors. Latin America: social and cultural factors
and Europe
Globerman and European economies in Governance infrastructure, education, environmental sustainability
Shapiro (2002) transition
Jun and Singh (1995) 31 developing countries Political risk, work days lost, export orientation, business conditions, tariffs, exports
Love and Lage- US FDI in Mexico Labor costs
Hidalgo (2000)
Mina (2007) GCC countries Oil production (2 ve), oil reserves (2ve), oil prices (2ve), GDP (2 ve)
Meyer and Estrin Egypt, India, South Africa, Broad survey of FDI
(2004) Vietnam
Moosa (2002) MENA GDP growth, education, R&D expenditure, country risk, domestic investment
Nunnenkamp (2002) 28 developing countries GDP per capita, administrative bottlenecks, risk, complementary factors of production,
education, cost factors, restrictions on foreign trade
Sethi et al. (2003) US FDI in Europe and Asia Europe: political and economic stability, GNP, infrastructure, skilled labour, cultural
proximity. Asia: liberalization, infrastructure, wages
MENA region
FDI in the

Table AI.
257
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