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Foreign Direct Investment, Absorptive Capacity and Growth in the Arab World

Arab countries have been performing very poorly in attracting FDI inflows relative to other developing countries since the early 1990s. Arab countries might hence be missing out on growth and development, if FDI is associated with positive externalities. The recent empirical literature on FDI and growth shows, however, that the latter is not always the case, and that FDI is more likely to have positive externalities in countries with a certain level of absorptive capacity for FDI. This paper looks at FDI and growth through absorptive capacity in the Arab world, given the available data on four different aspects of absorptive capacity: the technology gap, the level of workforce education, financial development and institutional quality. The results turn out to be highly sensitive to the specific measure of absorptive capacity used, but one conclusion is unambiguous. It is unlikely that the average Arab country currently stands to gain from FDI. As a consequence, costly financial incentives to attract more FDI might hence be wasteful, if not welfare reducing in Arab countries.

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Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 02-2005.

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Length: 22
Date of creation: May 2005
Date of revision:
Handle: RePEc:gii:giihei:heiwp02-2005
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  1. Smarzynska, Beata K., 2002. "Does foreign direct investment increase the productivity of domestic firms : in search of spillovers through backward linkages," Policy Research Working Paper Series 2923, The World Bank.
  2. Li, Xiaoying & Liu, Xiaming, 2005. "Foreign Direct Investment and Economic Growth: An Increasingly Endogenous Relationship," World Development, Elsevier, vol. 33(3), pages 393-407, March.
  3. Bruno Van Pottelsberghe & Frank Lichtenberg, 2001. "Does foreign direct investment transfer technology across borders?," ULB Institutional Repository 2013/6221, ULB -- Universite Libre de Bruxelles.
  4. Barro, Robert J & Lee, Jong-Wha, 2001. "International Data on Educational Attainment: Updates and Implications," Oxford Economic Papers, Oxford University Press, vol. 53(3), pages 541-63, July.
  5. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
  6. Sadik, Ali T. & Bolbol, Ali A., 2003. "Arab External Investments: Relation to National Wealth, Estimation, and Consequences," World Development, Elsevier, vol. 31(11), pages 1771-1792, November.
  7. Xavier Sala-i-Martín & Elsa V. Artadi, 2003. "Economic growth and investment in the Arab world," Economics Working Papers 683, Department of Economics and Business, Universitat Pompeu Fabra.
  8. Durham, J.B.J. Benson, 2004. "Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth," European Economic Review, Elsevier, vol. 48(2), pages 285-306, April.
  9. Haddad, Mona & Harrison, Ann, 1993. "Are there positive spillovers from direct foreign investment? : Evidence from panel data for Morocco," Journal of Development Economics, Elsevier, vol. 42(1), pages 51-74, October.
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