Foreign Direct Investment and Financial Development in Selected MENA Region Countries: Panel ARDL Approach

This article empirically examines the linkage between foreign direct investment (FDI) and financial development (FD) in 16 selected countries of the MENA region (Algeria, Bahrain, Egypt, Iran, Israel, Jordan, Kuwait, Lebanon, Malta, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, and the United Arab Emirates) over the period 2000–2018. The research investigates the long- and short-run effects of FD on FDI inflows using panel ARDL. This model is based on the dynamic fixed effect (DFE) estimator. The article employs three proxies of FD as developed by the IMF, namely, the overall financial development (OFD), financial markets’ development (FM), and financial institutions’ development proxy (FI). The purpose was to analyze the impact of FD by covering the depth, efficiency, and access to financial markets and their institutions. The findings suggest that even though no significant relationship is established in the short run, the long-run coefficients of the overall FD proxy and FM proxy are positive and statistically significant. The estimates suggest that a 1% increase in the overall FD proxy and FM proxy results in an increase of 172% and 150% of FDI inflows to MENA region countries, respectively.