Does Political Risk Affect the Flow of Foreign Direct Investment into the Middle East North African Region

Abstract

Given the political risk in the Middle East North African (MENA) region, this research aimed to unveil the importance of the different components of political risk on the change in foreign direct investment (FDI), controlling for other types of risks and macroeconomic factors. Furthermore, we look at whether there are differences in the factors that affect FDI between rich and poor countries in the region. Fixed effect and random effect dynamic models are applied on a sample of 16 MENA countries over the period 1984 - 2011. Taking all countries together, we find, as hypothesized, that agglomeration, market size, and political risk are significant and positively related to FDI. Additionally, among the 12 political risk components, the level of corruption and the level of external conflict have close association with FDI flows. FDI motives, however, vary greatly between rich countries and the non-rich countries in the MENA region.