Navigating the Investment Landscape in MENA: The Role of Economic Growth, Trade, Financial Development, and Governance in FDI Attraction

Abstract

This paper investigates the determinants of Foreign Direct Investment (FDI) in the Middle East and North Africa (MENA) region, with a particular focus on economic growth, trade policy, financial development, and governance indicators such as effective governance and political stability. Employing a robust fixed effect panel data analysis and utilizing data for 18 selected MENA countries covering the years 2000-2022, this study examines the complex interplay between the variables and their collective influence on FDI flows into the MENA region. The analysis reveals that economic growth and trade openness are significant positive determinants of FDI, highlighting the importance of fostering a robust economic environment and maintaining open trade policies. Financial development and business freedom exhibit complex relationships in the regression models, suggesting the need for holistic reforms addressing other structural and institutional factors. Moreover, among the governance indicators, effective governance and political stability emerge as crucial elements in attracting FDI, with significant positive impacts observed in both correlation tests and coefficient estimations. Conversely, high dependence on oil revenues and high real interest rates deter FDI, emphasizing the need for economic diversification and macroeconomic stability. Based on these findings, the paper proposes a set of policy recommendations, including promoting economic growth, enhancing trade openness, improving institutional quality, diversifying the economy, and maintaining macroeconomic stability to create a favorable environment for FDI. These strategies will drive sustainable development, economic diversification, and long-term growth in the MENA region.