The Importance of Trade Openness and Inflation for Attracting Foreign Direct Investment in GCC Countries

Abstract

Purpose: This paper examines the importance of trade openness for attracting foreign direct investment (FDI) inflows, for the GCC economies (Kingdom of Saudi Arabia, United Arab Emirates, Oman, Qatar, Kuwait and Bahrain) covering the period 1995-2018, using panel VAR model. Design/methodology/approach: It provides a direct test of causality between FDI inflows, trade openness, GDP per capita, and inflation. Findings: The main empirical findings of the panel analysis reveal that in the long run, trade openness contributes positively to the inflow of FDI in the GCC economies. The panel causality analysis shows that there is a unidirectional causal relationship running from trade openness and inflation to FDI, whereas no causality was traced with other variables. Practical Implications: The panel long-run estimation suggests that trade openness, have positive impact on FDI inflow confirming the results. Originality value: The paper investigates the effect of trade openness, and inflation on FDI inflows in GCC economies by using panel data for the period 1995-2018.