1. Research statement
By Mohammed SH Abdallah
FDI in the European Union and MENA Countries
(Work in progress)
1 – Abstract: FDI flows to the Middle East and North Africa countries (MENA) have been relatively low when
compared to the neighboring European Union (EU) and to other developing and emerging countries.
Furthermore, empirical research on FDI in these countries is relatively scarce. In this paper I will illustrate the
factors which may help to understand FDI revolving around its incubator field (Technology transfer).
2 – Introduction: The European Union (EU) has worked firmly to deepen and intensify its commercial
relationship with its neighboring developing countries. In 1991, the EU has subscribed its first European
agreement with Hungary and Poland; in 1995 a custom union with Turkey was ratified and similar agreements
with Morocco and Tunisia gave birth to Euro - Mediterranean Agreement. Those agreements represented the
basis of a wider integration process that involved a wider partnership with both Eastern Europe and
Mediterranean countries. Among these countries, it is widely believed that foreign direct investment (FDI)
offers one assured path to economic development.
3 - FDI inflows in the MENA region: The Mediterranean countries have been relatively successful in
attracting FDI flows over recent years. Compared with 1992-1997 annual average, FDI inflows in the
Mediterranean countries more than doubled in 2003 to USD 9.927 million. In the 1980s, many MENA countries
have shifted their import substitution policy to export-led growth that can be seen as a more open and
attractive environment for FDI. MENA countries have performed many liberalization reforms in order to
encourage FDI inflows. These reforms include tax and custom duty breaks, relaxed foreign ownership
restrictions, and implemented privatization and capital market reform programmes (Eid and Paua, 2003;
UNCTAD, 2004). Despite some progress in economic policy, essentially in the 1980s for macroeconomic
stability and in the 1990s for structural reforms, MENA countries have failed to attract much FDI.
4 - Why is FDI? : The theory of foreign direct investment (FDI) seeks to explain the existence and growth of
foreign investments. It also aims to identify the determinants of FDI flows and the effects of such flows on the
host and home country economies, as well as on world welfare. It is widely believed that FDI in host countries
has a very critical role in boosting the economic growth through the employment effect (creating jobs),
technology spillover, etc., especially in the case of developing countries. Compared to indirect investment
(short-term loans and portfolio investment), foreign direct investment has the potential of being a much better
tool that offers sustainable economic development.
The governments of Euro-Mediterranean basin established the Euro - Mediterranean Partnership (EMP) and
adopted the Barcelona Declaration in November 1995. The best-known aspect of the process is the creation of
a free trade zone by the year 2010. The countries highlighted the importance of creating an environment to
attract FDI, which could lead to the transfer of technology and increase production and exports.
5 - How is FDI flows in MENA region? : Although almost all MEDA countries have implemented new
legislations in the 1990s in order to establish an attractive environment for FDI, the speed of their integration
process varies considerably. This is mostly due to the differences in the economic and social structures of
these countries, i.e. Algeria, Cyprus, Egypt, Israel, Jordan, Morocco, Syria, Tunisia and Turkey. Although these
countries have common features, differences in income generate different development levels. In UNCTAD’s
2000-2002 classification of countries according to their levels of FDI vis-à-vis potentials, only four MENA
countries were classified as either “Front-Runners” or “Above- Potential.” The rest were classified as “Below-
Potential” or “Under-Performers.” (1) That’s due to:
1. Poor Science and Technology (S&T) infrastructure: Gross Domestic Expenditure on Research and
Development (GERD) in Arab States (most of which are in the MENA region) as a percentage of world GERD
is about 0.4%, the lowest amongst the regions reported in the table. GERD as a percentage of GDP in Arab
States is 0.2%, again the lowest of all the regions, lower in fact than Sub-Saharan Africa (SSA). Only a paltry
1.6% of researchers in the world are located in Arab States (2).
2. The number of patents granted to firms in the MENA region: during the period 1989-1996 was a paltry
200, compared with 11, 302 for Korea, 1, 725 for Singapore, 1,510 for India, and 1,081 for Hong Kong
(Statistical Abstract of the World, 1996).
3. MENA countries export predominantly low-tech products: reflecting their lack of investment in
technological innovation. The volume of scientific publications by MENA scientists in international journals is
also considered to be unimpressive (Radwan and Kassem, 2002, p.415).
4. Most of the researchers in the MENA region are employed in the public sector and higher education,
rather than in business enterprises. Of the four MENA countries for which data were available, only Israel had

2. a significant portion (82%) of its R&D personnel employed in business enterprises, followed by Turkey with
about 30%.
6 – Theoretical and practical observations:
1. A theoretical framework: The Romer (1986) growth model (3) (relationship between economic growth and
FDI flows): this relationship shows three evidences First, if most of LA (LA stands for the number of workers) is
concentrated in government labs and other public institutions, much of the knowledge generated will be “basic
knowledge,” rather than “applied knowledge” or applied research. Thus, a country may have a large number of
scientists and engineers engaged in R&D, but still experiences slow growth and poor FDI performance.
Second, if property rights are not well-protected in a country, firms will be reluctant to make knowledge
available to the public through patenting and other contractual forms in the technology market. Consequently,
Ø ( 0 <= ø <= ∞ , is a parameter that measures the magnitude of knowledge spillovers ) will tend toward zero,
leading to both a lower A and Ac. Third, if firms in an economy lack absorptive capacity, they may not be in a
position to assimilate and commercialize new knowledge. Again, this will slow down the growth process and
reduce FDI flows.
2. The Empirical Model (Logit Model): Openness of the Economy, The logit model was estimated for the 61
countries (including 11 MENA countries) listed under “Front-Runners” and “Below-Potential” (4) It can be seen
from the table that none of the science and technology indicators is significant, suggesting that the propensity
for a country to attract an optimal level of FDI is unrelated to the country’s investment in science, technology
and human capital. This implies that foreign investors consider mainly non-technological factors when making
investment decisions.
7 – How can FDI be developed In MENA Countries? : Linking FDI and the domestic economy through
strengthening business linkages between FDI and SMEs is one of the most effective ways of:
1. Upgrading domestic enterprises.
2. Facilitating the transfer of technology, knowledge and skills.
3. Improving business and management practices.
4. Facilitating access to finance and markets.
This can support directly the efforts of FDI growth for developing countries in general.

3. 7 - Results & Comparisons:
• As one of the biggest CEE countries, Poland still remains as country with high unemployment rate with
estimated unemployment rate of 10,3% in 2007. This outcome leaves doubts about how much Poland succeed
to utilize the FDI presence in contriving better economic growth. While analyzing the high unemployment rate
through years, one conclusion is that FDI influence was deficiently used in terms of employment.
• Landlocked developing countries (LLDCs) with their complicated circumstances have some special factors
which can be harnessed - apart from the political factors - to be applied theoretically in one of the most inactive
region in MENA countries ( Gaza strip – West bank ) .
• Although FDI inflows to ESCWA region down 6.3 percent. However, saudia Arabia, the United Arab Emirates
(UAE) and Egypt. They accounted for nearly 76 percent of FDI flows to the region. FDI to Saudia Arabia
amounted to $22.5 billion out of the total amount $60 billion in 2008 in the ESCWA region. (6) Saudia Arabia
can be a good chance for FDI inflows .the trend to study the possibilities to apply the Islamic banking system in
Europe can be more polished with FDI in saudia Arabia.
8 – Closure:
This paper is an ongoing work in conformity with the intensive lectures which I am attending in the "Techniche
di commercio estero" (Technique of foreign trade - exporting the Italian model) in the period between 1st
September 2009 till 23rd
October 2009. The aforementioned theoretical period will be followed with a serious
stage for two months inside one of SMEs in the region of Emilia-Romagna .an incentive progression for this
work in prospect for my experience in such field.
9 – References:
(1) Table of Matrix of Inward FDI Performance and Potential, 2000-2002, As the table 1 shows, nearly 40
percent of the countries listed as “Below-Potential” are MENA countries .
(2) Table of Regional Science and Technology Indicators: *GERD stands for Gross Domestic Expenditure on
Research & Development, Source: Computed from UNESCO statistics published in The State of Science and
Technology in the World, Paris, UNESCO Institute of Statistics, 2001, p. 7.
(3) The version of the Romer model used in this paper was adapted and modified from Audretsch and
Keilbach (undated).
(4) Some of the countries were excluded because of the non-availability of data.
(5) Polish Federation of Engineering Associations Innovation Centre Not (2007). Polish experience in support
of employment growth through innovation. European Program. Project Work in Net, Warszawa March 2007.
(6) Article originally published by The Daily Star 15-Sep-09