Impact of Country Risk and New Institutional Economics on Foreign Direct Investment: a Panel Data Analysis for Mena Region (1999-2010)
Abstract: Despite the significant increase in FDI, the MENA region has unimpressive performance in attracting FDI when compared to other developing countries. This performance raises concerns regarding the past economic reforms in several MENA countries. In addition, the region is expected to acquire less FDI inflows in the coming years due to current political instability. This research aims to explain the relationship between the risk of the country and its ability to attract FDI and also aims to investigate whether the New Institutional Economics (NIE) do matter in FDI decisions to the MENA region. Multiple linear regressions and panel data analysis are used to consider unobserved heterogeneity and cross-country differences for twenty MENA countries during the period of 1999-2010. The results show that low levels of economic and financial risk has a positive but insignificant impact on FDI while high level of political risk has –unexpectedly- positive and significant impact on FDI flow. New Intuitional Economics measures also have mixed results. Investment freedom, monetary freedom, and regulatory quality have positive and significant impact on FDI while business freedom, and voice & accountability have negative and significant impact. The results show the importance of using the detailed sub-indicators instead of the composite measures. Regarding traditional determinants of FDI, market size and efficiency seeking motives represented in GDP and trade openness have significant positive impact on FDI while resource-seeking motives has negative impact. Based on these results, a set of policy recommendations and implemented actions are suggested for decision makers in order to attract more FDI to the MENA region.
