Foreign Direct Investment in The Arab World: Creating The Missing Link

Levels of FDI in MENA are characterized by four main features. First, FDI flows into MENA have not kept pace with flows to the rest of the world, and they have been lower than the average for all other regions of the world. Second, most FDI flows have gone only to a handful of countries, and have been concentrated in a few sectors with limited investment scope. The third feature is that FDI stocks and flows have constituted a small part of the region’s economies both in terms of gross fixed capital formation and gross domestic product. The fourth feature, possibly the only piece of good news, is that intra-Arab investment comprises a significant proportion of FDI inflows to countries in the region, and is likely to be underestimated in international financial statistics. This paper suggests a more variegated, even case-by-case look at the way we approach FDI. After reviewing the global and regional picture on FDI, and taking a look at the record for Arab countries, the paper suggests some fine-tuning in the way we structure efforts to attract FDI. For the non-oil economies in particular, where entrepreneurial talent abounds among the highly educated members of the populations, I suggest a shift in policy balance that might re-formulate some FDI incentives for strategic sectors such as information and communication technology, and services. Such efforts might very well yield relatively higher positive externalities than what Arab countries have reported to date. The argument becomes even more compelling when we consider that many of the requisite conditions necessary to attract higher levels of “traditional” FDI to the Middle East are not likely to become more abundant soon for structural and geopolitical reasons. There has been reform in the region, but it has been slow and time has increasingly high opportunity costs for countries with large proportions of unemployed youth, a good number of them fairly well skilled.