Output Volatility And Fdi To Middle East And North African Countries: A Close-Up On The Source Countries

Macroeconomic determinants of FDI are seldom analysed from the perspective of source countries, priority generally being given to host country characteristics. Using a gravity model, we analyse FDI flows from a sample of European and non-European countries to MENA economies. We find that European investment to our chosen MENA host countries is higher the higher the source country output volatility, thus lending support to the existence of a substitution effect for European transnational corporations. We also find that the 1995 Barcelona agreement has reinforced MENA countries’ vulnerability to European short- and medium-term macroeconomic cycles. Regional integration of MENA economies and the emergence of new sources of FDI for MENA economies is not necessarily a positive development since investment to MENA countries coming from the Mediterranean periphery of Europe is affected by a revenue effect, with FDI flows being reduced when macroeconomic volatility increases in the zone. Our results are robust with respect to various changes in estimator, sample composition and measurement of instability.