Do Institutions Matter for FDI? A Comparative Analysis for the MENA Countries

Abstract

The paper analyses the underpinning factors of foreign direct investments towards the MENA countries. Our main interpretative hypothesis is based on the significant role of the quality of institutions in order to attract FDI. In MENA experience the growth of FDI flows proved to be notably inferior to that recorded in the EU or in Asian economies, such as China and India. Our research, firstly, stresses three major factors for such a poor performance: i) the small size of local markets and the lack of real economic integration; ii) the changes in the scenario of international competition; iii) economic and trading reforms in the MENA have been slow and mostly insufficient. Using the Kaufmann, Kraay and Mastruzzi (2005) governance indicators, we examine the role of "institutional quality" on FDI through a regression analysis. Our analysis shows that institutions play an important role in the relative performances of countries in attracting FDI. Lastly, data on institutional quality and business climate show the relative disadvantages of MENA. Our paper suggests that MENA countries require deep institutional reforms in order to improve their attractiveness in terms of FDI.