FDI Profiles

This section relies on a dataset on green-field FDI projects into 17 Arab countries assembled from a unique type of online database developed by FDI Intelligence, a specialist division of the Financial Times, which monitors cross border investments in new projects and expansions of existing ventures, covering all sectors and countries worldwide in 2020.

 

The major advantage of the data source used with respect to UNCTAD data is the availability of a sectoral classification for each investment project. The data includes estimated values on capital investment and the number of jobs created in cases where information was not available at project announcement.

Countries

WP/2019/02: How Does Political Risk Matter for Foreign Direct Investment into Arab Economies? A Gravity Model Analysis

 

Abstract: The main objective of this paper was to test if political risk act as barriers to bilateral greenfield FDI inflows into Arab countries. The empirical estimation results confirm this hypothesis and are robust to the linear as well as alternative non-linear estimation procedures. Increasing the institutional instability or political risk perceptions in Arab countries has negative impacts on their bilateral FDI inflows.
The paper contributes to the existing literature by testing several hypotheses that help explain the mixed results of previous studies regarding the foreign investor’s responses to political risk in developing countries. It establishes in particular that there is considerable heterogeneity in foreign firms’ investment responses to political risk in Arab countries. This heterogeneity reflects differences in the type of political risk and sectoral characteristics. The findings show that the considered three political risk components, expropriation/breach of contract, transfer/convertibility and war/political violence risks, have a negative and statistically significant impact on the probability that bilateral investment takes place. However, only the transfer/convertibility risk negatively and significantly affects the size of foreign investments made. In addition, the findings reveal striking differences from sector to sector as concerns the relevance of home country PR components in the two-step decision of foreign firms on FDI in the Arab countries. While the FDI participation probability is strongly negatively correlated with at least two of the three political risk components, irrespective of the investment sector, the size of the FDI projects in resources and energy sector has the particularity of being insensitive to any component of political risk.
Several policy implications emerge from this study:

  • First, because political uncertainties vary by sector and political risk component, it is imperative to collect and examine disaggregated greenfield FDI and political risk data when analyzing FDI in Arab countries.
  • Second, institutions offering investment guarantees must recognize the differential exposure and sensitivity of foreign firms to political and institutional fragility when pricing risk.
  • Third, political risk appears most detrimental to those types of investments that the Arab region most needs, notably in labor-intensive and high technology tradeable manufacturing and tradable services industries. Greenfield FDI in these activities could foster structural change and help countries create middle to high-skilled and higher wage jobs. FDI in non-tradables is also sensitive to political and institutional uncertainties, particularly those relating to transfer and convertibility risks, however this type of investment is largely based on market‐seeking motives and hardly contributes to structural change. Likewise, FDI to resource-rich countries can hamper rather than facilitate countries’ efforts to escape the resource trap or Dutch disease.
  • And last but not least, the efforts of Arab countries to diversify and attract FDI into manufacturing and tradable services sectors has to be accompanied by efforts to improve political stability and institutional quality. An adapted political risk insurance targeting prospective investors in a specific sector is an additional important factor worth looking into when balancing the risks investors face and the gains they anticipate.

Author: Riadh Ben Jelili