Foreign Direct investment in the Arab world

1. UNIVERSITY OF TRENTO
FACULTY OF ECONOMICS AND MANAGEMENT
MASTER IN INTERNATIONAL MANAGEMENT
Overviews of The Master’s Thesis
Foreign Direct Investment in the Arab world:
an Analysis of Flows and an Evaluation of Country Specific Business Environment
(Author Abed El-Azez Safi, Under Supervisor Prof. Marco Zamarian)
The main goal of this research is focusing on analysis of the empirical data of the foreign direct
investment (FDI) in the Arab countries and evaluating the business environment. FDI
is
the
net
in+lows
of
investment
to
acquire
a
lasting
management
interest
(10%
or
more
of
voting
stock)
in
an
enterprise
operating
in
an
economy
other
than
that
of
the
investor.
It
is
the
sum
of
equity
capital,
reinvestment
of
earnings,
other
long-­‐term
capital,
and
short-­‐term
capital
as
shown
in
the
balance
of
payments.
FDI
is
a
key
driver
of
international
economic
integration,
and
it
is
one
of
the
most
important
factors
of
international
globalization.
With
the
right
policy
framework,
FDI
can
provide
+inancial
stability,
promote
economic
development
and
enhance
the
well
being
of
societies
and
cultural
diversity.
This study research is substantial because it highlighted the role and significance of the FDI in
the economic of the Arab World, and because this is the first time to analyze the empirical data of
the whole 22 Arab countries and the country performance of sectors and sources of investment
particularly the Gulf Cooperation Council economy (Saudi Arabia, Qatar, Bahrain, Oman,
Kuwait, and United Arab Emirates). In addition, to the analysis of the FDI I evaluate the
investment business environment in the Arab World through the six dimensions of the Worldwide
Governance Indicators (WGIs), and the eleventh topics doing business reports.
The methodology, which was used in this research, is to analyze the empirical data of the FDI in
the central banks of the Arab World, United Nations Conference on Trade and Development
(UNTCAD), World Bank, International Monetary Fund (IMF), Economic and Social
Commission for Western Asia (ESCWA) Institute, books, international reports, articles, and FDI
websites researches. For more details there was a screening of the GCC countries websites, and
other reliable investments agencies. Nevertheless, the evaluation of that empirical data for the
business environment in the Arab World was through my background knowledge and
1

2. interpretation of the Arab countries situation and culture experience.
However, Global FDI flows rose to $1.24 trillion in 2010, but were still 15% below their pre-
crisis average. This is in contrast to global industrial output and trade, which were back to pre-
crisis levels. The UNCTAD estimates that global FDI will regain its pre-crisis level in 2011,
increasing $1.4–1.6 trillion, and approaching its 2007 peak in 2013.
This research consists of four chapters, and in regards to the essential conclusion of those four
chapters. The first chapter concentrates on former recent scholars studies of the FDI analysis are
done in the Arab World and the scholars theories of the FDI. The recent research of (Krogstrup &
Matar, 2005) on the FDI and growth through absorptive capacity in the Arab world showed that
the performance of the Arab World is very poor in attracting FDI inflows relative to other
developing countries since the early 1990s, and they receive only a small fraction of FDI inflows
comparing to developing countries, both in absolute terms and relative to GDP. Only Jordan, and
very recently also Tunisia and Morocco, appear to have performed well above the average ratio
as compared with the rest of the world in its ability to attract FDI. In addition, I discuss the four
types theories (the market imperfections theory, international production theory
internationalization theory and the eclectic paradigm theory) which were developed by
Hymer, Dunning, Buckley and Casson.
In other words, the second chapter focuses on the analyzing of the empirical data of FDI during
the period 2006-2010 by using the framework of the UNCTAD that makes the comparison
between inflows and outflows of the developed economies and developing economics. However,
the FDI analysis of 2010 shows for the first time developing economies are absorbed close to
half of global FDI inflows comparing to the developed economies. The developing countries
have not been spared from the effects of the crisis, but still they managed to deal with it better
than the developed world, both in terms of economic growth and attracting FDI. while the Arab
World consider as developing economy. Nonetheless, Saudi Arabia was ranked among the 10 top
countries of FDI recipient. So, the concept of transforming the FDI to developed world is not any
more reliable. In addition, I explained the estimation of the increasing and decreasing inflows
and outflows of the FDI statistical data of the 22 Arab countries through the same period and the
2

3. FDI percentage from the GDP of each country during 2008, 2009 and 2010. Also, I found out the
FDI inflows to the Arab world reached its highest peak ever in 2008 ( See Table 1). Arab world
countries have witnessed a major increase in the level of FDI inflows over the past decade. FDI
inflows to Arab countries from 2006 till 2010 were fluctuating from one year to the other. The
GCC countries are the highest receiver of FDI in the Arab World during the last five years; it
increased from 54% to 60% in 2006 till 2010. This showed the economic stability and
development of economic situation in the GCC region to confirm that. The FDI and stocks is
concentrated in few countries for instance about 80% of the FDI in 2010 is concentrated in six
countries: Saudi Arabia 42%, Egypt 10%, Qatar 8%, Lebanon 7%, United Arab Emirates 6% and
Libyan Arab Jamahiriya 6%. The More Diversified Economics “MDEs” (Algeria, Egypt, Libyan
Arab Jamahiriya, Morocco, Tunisia, Iraq, Jordan, Lebanon, Palestinian Territory, and the Syrian
Arab Republic) were 39% during 2006 and decreased by 6% in 2008 and it recover back this
decline in 2010 to become 38% in comparing to GCC and Least Developed Countries
“LDCs” (Mauritania, Comoros, Djibouti, Somalia, Sudan, and Yemen). The reason of declined in
MDEs comparing to LDCs and GCC region in the Arab world it was because of the
attractiveness of FDI inflows to the GCC region.
Table 1 FDI inflows in Arab Countries, 2006-2010 (Millions of US dollars and % GDP)
Region / Economy
FDI inflows (Millions of US$)FDI inflows (Millions of US$)FDI inflows (Millions of US$)FDI inflows (Millions of US$)FDI inflows (Millions of US$) FDI/GDP (percentage)FDI/GDP (percentage)FDI/GDP (percentage)
Region / Economy 2006 2007 2008 2009 2010 2008 2009 2010
Bahrain 2 915 1 756 1 794 257 156 8.19 1.25 …
Kuwait 121 112 - 6 1 114 81 0.00 1.02 …
Oman 1 588 3 431 2 528 1 471 2 045 4.87 3.22 …
Qatar 3 500 4 700 3 779 8 125 5 534 3.41 8.26 …
Saudi Arabia 17 140 22 821 38 151 32 100 28 105 8.28 9.78 4.96
United Arab Emirates 12 806 14 187 13 724 4 003 3 948 5.25 1.74 …
GCC Economy 38 070 47 007 59 970 47 069 39 870
Mauritania 106 138 338 - 38 14 9.43 -1.27 0.37
Comoros 1 8 8 9 9 1.42 1.70 1.74
Djibouti 108 195 229 100 27 23.17 9.23 …
Somalia 96 141 87 108 112 ... … …
Sudan 3 534 2 426 2 601 2 682 1 600 4.48 4.87 4.66
Yemen 1 121 917 1 555 129 - 329 5.78 0.49 …
Least developed countries 4 965 3 825 4 817 2 990 1 433
Algeria 1 795 1 662 2 594 2 761 2 291 1.52 1.96 1.44
3

4. Egypt 10 043 11 578 9 495 6 712 6 386 5.83 3.55 2.92
Libyan Arab Jamahiriya 2 013 4 689 4 111 2 674 3 833 4.41 2.74 …
Morocco 2 449 2 805 2 487 1 952 1 304 2.77 2.16 1.36
Tunisia 3 308 1 616 2 758 1 688 1 513 6.46 3.67 3.41
Iraq 383 972 1 856 1 452 1 426 2.14 2.23 1.74
Jordan 3 544 2 622 2 829 2 430 1 704 12.45 9.67 6.17
Lebanon 3 132 3 376 4 333 4 804 4 955 14.41 13.75 12.65
Palestinian Territory 19 28 52 265 115 … … …
Syrian Arab Republic 659 1 242 1 467 1 434 1 381 2.79 4.76 2.34
More diversified economies 27 345 30 590 31 981 26 169 24 907
Total of FDI inflows to Arab World 70 380 81 422 96 767 76 228 66 210 4.97 4.70 3.24
Furthermore the basic goal of the third chapter in this research was focusing on FDI in Arab
World through studying the role and significance of FDI flows in the economical performance by
sectors and sources of the six countries GCC economy. In addition, to political side, and the new
policies and regulations that have been followed in the recent years to encourage the FDI in the
GCC economy. Also, I showed the effect of Dubai Crisis and the declined price of the oil cost in
2009 on the FDI inflows and outflows, and the GCC region experience. However, I found the
majority of foreign investment trend by sectors are concentrated in Arab countries focusing
mainly on the real estate, oil and gas, and hotel sectors. In addition to the big share of FDI
inflows to the GCC region by sources was from non-Arab countries USA first rank followed by
United Arab Emirates and Kuwait, respectively from Arab countries.
Finally, in the fourth chapter I interpreted the empirical data through my background knowledge
about country specific business environment based on the statistical data of the six dimensions of
WGIs (Voice and Accountability, Political Stability and Absence of Violence/Terrorism,
Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption) in
linked with the FDI inflows, Arab literacy and Arab Spring (Arab Revolution, 2011) after the
previous interpretation, I tried to show the dimensions’ correlation and I also estimated the
eleventh Doing Business topics of 2012 (starting a business, dealing with construction permits,
getting electricity, registering property, getting credit, protecting investors, paying taxes, trading
across borders, enforcing contracts and resolving insolvency) were mainly aggregated by the
4

5. World Bank captured by the multinational agencies and the non-governmental organizations
(NGO’s). The interpretation results shows the business environment and the economic
performance of the Arab World still improving and the new policy and regulation that have been
implemented in the Arab countries increased the attractiveness level of the FDI toward Arab
countries. Also, Despite the low rank of WGI in Arab World and the correlation of investment in
some of the six indicators between countries in the Arab world especially in the highest receiver
of FDI flows and in particular the GCC region the Business Doing reported great rank in regards
to the proper business atmosphere for foreign investors. The six of the Arab countries Saudi
Arabia, UAE, Qatar, Bahrain, Tunisia and Oman have climbed the scale on the ease of doing
business ranked among the top 50 out of 183 countries, while Algeria, Comoros Mauritania, Iraq
and Djibouti ranked very low on the same scale (see figure 1). The new policy and modification,
which has been confirmed from World Bank by the Doing Business reports about the business
environment of Arab World, show that their domestic laws in these countries pay attention to
foreign companies to increase the investment in Arab world.
5

6. Figure 1 How Arab World Rank on the Ease of Doing Business, 2012
In the End, I found out the 2010 WGI’s can give the foreign and local investors a general
overview about the situation of the Arab World, but still isn’t confident enough to be reliable for
some countries special in case of Tunisia, and it can be exaggerating from the expert who made
the survey or the local citizen and institutes have the fear to contribute in give this information.
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