Foreign Direct Investment and Economic Growth in Arab Countries (1970-2008): An Inquiry Into Determinants of Growth Benefits

This paper investigates the relationship between Foreign Direct Investment (FDI) and economic growth in a group of 16 Arab countries from 1970 to 2008. The empirical analysis also addresses the role of what are identified in the literature as local ¡°preconditions¡± for deriving growth benefits from FDI. Using a dynamic panel approach, it is found that the impact of FDI on economic growth in Arab countries is limited or negligible. The findings also suggest that financial development, trade openness, human capital and infrastructure quality are not significantly improving Arab countries¡¯ capacity to reap growth benefits from FDI. The paper suggests that the preconditions should not be seen as of equal importance. The sectoral composition of FDI plays a critical role in deriving FDI growth benefits which might make it a ¡°necessary¡± precondition for FDI to promote economic growth, while other factors such as financial development, trade openness, human capital and infrastructure quality could be seen as sufficient preconditions for reaping FDI growth dividends. The paper¡¯s findings have important policy implications as Arab countries can turn to domestic policy solutions to direct FDI inflows to the dynamic sectors and focus not only on FDI ¡°quantity¡± but also on FDI ¡°quality¡±. Meanwhile, efforts should be made to reform and improve institutional quality, macroeconomic policies, and domestic financial markets.