Determinants of Foreign Direct Investment in the Middle East and North Africa Region: Evidence From Balanced Panel Data Analysis

Abstract

This study examines the determinants of Foreign Direct Investment (FDI) inflows into 24 economies in the Middle East and North Africa (MENA) region from 1980 to 2023. Utilizing Dunning’s Eclectic Paradigm (OLI framework), institutional theory, and transaction cost economics, this research investigates how ownership, location, and internalization advantages influence FDI decisions in a region characterized by significant resource dependence and institutional heterogeneity. To ensure the robustness of our findings, we employ second-generation panel data techniques, including Fully Modified Ordinary Least Squares (FMOLS), Dynamic Ordinary Least Squares (DOLS), Common Correlated Effects Mean Group (CCEMG) and Augmented Mean Group (AMG). These methodologies effectively address issues such as Cross-Sectional Dependence (CSD) and Slope Heterogeneity (SH). Our results indicate that institutional quality, particularly in relation to control of corruption and government effectiveness, exerts a strong positive impact on FDI inflows. Conversely, natural resource abundance demonstrates a negative relationship with overall FDI, thus corroborating the “resource curse” hypothesis within the MENA context. Market size significantly positively influences FDI attraction. Notably indicators of political stability and regulatory quality do not consistently show statistical significance across the model, implying that broader stability metrics may inadequately capture investor sentiment. In contrast, control of corruption and government effectiveness emerge as more salient institutional mediators of FDI decisions. These findings contribute to the existing literature by providing a context-specific analysis of FDI dynamics in the MENA region, employing advanced econometric estimators that have been underutilized in prior studies, and enhancing methodological transparency through the construction of composite variables. The results furnish actionable insights for policymakers seeking to attract sustainable foreign investment through institutional reform and macroeconomic stabilization.