Military expenditure and foreign direct investment inflows: evidence from selected Arab League nations

This paper examines how military expenditure (milex) shapes foreign direct investment (FDI) inflows in eleven Arab League countries over 1990-2024, a region where rentierism and security alliances create distinct geoeconomic dynamics. Employing the defactored instrumental‑variable (DF‑IV) estimator, we address simultaneity, cross‑sectional dependence from common regional shocks, and cross-country heterogeneity across the Arab League sample using lags of peacetime arms imports as instruments. The baseline estimates show that the milex–FDI relationship is sensitive to identification strategy: fixed-effects estimates are negative, conventional 2SLS estimates are positive, while DF-IV estimates are positive under conventional inference but are not supported by Anderson-Rubin inference. Additional robustness checks show that resource rents moderate the milex–FDI relationship and that broader U.S. security presence partly captures external security dynamics. Taken together, the evidence suggests that milex is not a robust universal attractor of FDI in our sample; rather, its estimated effect depends on the regional security environment, resource dependence, and instrument construction.