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...extend previous empirical by focusing on foreign investments in that region. The second objective is to focus on non-traditional determinants that have tended to be overlooked or underestimated in previous research. The paper will focus on factors such as governance, legal environment, and economic freedom and examine their impact on foreign investment activities in the MENA region.
Introduction
The objective of this paper is to focus on two significant research questions that have not yet been thoroughly examined in the literature on foreign investment. Over the last 15 years, the flow of foreign investment around the world has been growing spectacularly. While international trade has doubled, the flow of foreign direct investment (FDI) has increased by a factor of 10 (Levy-Yeyati et. al, 2003). Within the various regional growth of foreign investment, FDI flowing to developing countries has accounted for about 40 per cent of global FDI (Erdal & Tatoglu, 2002). Although there is substantial literature examining the flow of foreign investments into various regions of the world, unfortunately the majority of this research has focused on U.S. foreign investment activities in Europe, NAFTA Signatory nations, Asia and Pacific Rim nations, and economies in transition (Kingsley & Crumbley, 1997). There is a paucity of information and studies relating to joint ventures and foreign investment activities in the Middle East and North Africa (MENA) region. The first objective of this paper is to remedy this neglect and extend previous empirical work by focusing on foreign investment in the MENA region.
When looking at foreign investment data within the MENA region, one can't help but notice the wide variability in the flow of foreign investment and joint venture activities, and wonder why some countries are more attractive to foreign investments than others. In trying to determine some of the factors that impact foreign investment flow, it is important to distinguish between three categories of foreign investment, these are: 1) market seeking; 2) resource seeking; and 3) efficiency seeking investments (Dunning, 1993). A 1998 UNCTAD report argued that globalization has led to a reconfiguration of the ways in which multinationals pursue these various types of foreign investments, and changed the motives for and the determinants of FDI (Dunning, 1999). For example, in recent years, foreign investment in developing countries has shifted from market and resource seeking investments, to more efficiency seeking investments (Dunning, 2002). This has prompted some to argue that the relative importance of some of the traditional market related factors (relative wage costs, infrastructure, macroeconomic policy) no longer hold (Loree and Guisinger 1995) and to suggest that less traditional determinants have become more important (Noorbakhsh, Paloni and Youssef 2001; Addison and Heshmati, 2003; Becchetti and Hasan, 2004). Furthermore, given that in recent years, the region is witnessing a new era in privatization, bank regulation and market-oriented financial institutions (Omran, 2004), the need to examine the role of alternative determinants is even more relevant.
The majority of the countries in that region are neither big enough to attract a significant number of market seeking foreign investment, nor resource rich enough to attract resource seeking foreign investment. Therefore, in analyzing foreign investment in the MENA region the second objective of this paper is to focus on some of the non-traditional factors that have tended to be overlooked or underestimated in previous research on foreign investment. In light of this focus, the paper will thus consider factors such as governance, legal environment, and economic freedom and examine their impact on foreign investment in the MENA region.
Hypotheses
Foreign Investment and the MENA Region
Foreign investment has numerous effects on the economy of the recipient country. It influences the labor market, income, prices, export and import (Erdal and Tatoglu. 2002). It is an important vehicle for the transfer of technology and a positive contributor to economic growth (Lim, 2001). Unfortunately however, the recent unprecedented growth in foreign investment activities has largely bypasses the Arab world (UNCTAD, 1999). Compared with other developing countries, the capital inflow in the Arab world has remained constant at about $10 billion in the last 2 decades, whereas it has increased four times to reach $300 billion in other developing countries, mainly in East Asia, Latin America and increasingly in Central Europe. Recent analysis revealed that the Arab world received on average 1% of global FDI in the 1990s compared to 2% of their share in world GDP. Most of these FDIs were concentrated in six Arab countries, namely Egypt, Jordan, Morocco, Oman, Saudi Arabia and Tunisia and were mostly undertaken in the oil, petrochemical, and manufacturing industries, especially textiles, metals and minerals (Sadik and Bolbol, 2001).
Comparing inward FDI performance with potential for the same region produces a matrix representing front runners, below potential, above potential and under performers respectively:
High FDI Performance Low FDI performance High FDI potential Front Runners: Bahrain, Below Potential: Egypt, Jordan, Israel Kuwait, Lebanon, Libya, Oman, Qatar, Saudi Arabia, UAE Low FDI potential Above Potential: Under-Performers: Algeria, Morocco, Sudan Iran, Syria, Tunisia, Turkey, Yemen Source UNCTAD: Inward FDI performance and potential 1999-2001.
Further examination of some of the countries in this matrix reveals some interesting information. For example, although it is the largest economy in Eastern Europe, the European Union's sixth biggest trading partner, and the world's 7th largest emerging economy, Turkey is an under-performer. FDI flow into Turkey is only a fraction of the level of FDI attracted to countries of comparable size and development like Argentina and Mexico, and only one-quarter of the level of FDI attracted into Poland (Loewendahl, and Ertugal-Loewendahl, 2000). On the other hand, a significantly smaller country, Bahrain has managed to be a front runner. The country has been able to attract foreign investment through significant incentives such as labor subsidies, electricity and land rental rebates, 100% rebate on customs duties for major equipment/raw materials, export credit facilities and tariff protection. Many investors cited the country's tax structure as their key motivation to invest. Bahrain imposes virtually no personal tax, no restriction on capital or profit repatriation and most significantly no corporate taxation. (Gilmore, et al. 2003).
It is important to note that the recent shift from markets and resources seeking investments, toward more of an efficiency seeking investment could--if properly exploited--be advantageous to the MENA countries due to their relatively small market sizes and limited natural resources. The main objective of market-seeking investment is to meet demand in the domestic market. In resource-seeking investment, the objective is to make use of the host country resources to produce goods for sale outside the local market (Asiedu, 2002). Demands and resources however, are less relevant in efficiency seeking investment, where the emphasis is more on the efficiency with which foreign investors can operate, network, sell and export their products to other countries. Therefore, in striving to attract foreign investment, the most viable among the alternatives for the MENA region, would be a focus on efficiency seeking investors. Such notion reinforces the importance of examining efficiency enhancing elements such as governance, the legal system and economic freedom and their impact on foreign investment.
Governance
Globerman and Shapiro (2002)...
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