Labor Market Policies and FDI Flows to GCC Countries

The six oil-rich Gulf Cooperation Council (GCC) countries adopted interventionist labor policies in the early 1990s to increase employment of nationals and control expatriate labor mobility. In the second half of the 2000s the GCC countries switched to market-oriented, flexible labor policies, intended to equate the cost of national and expatriate labor and enhance expatriate labor mobility. After the 2011 Arab Spring, the GCC labor policy responses had differed. In this paper we empirically examine the impact of market-oriented labor policies on FDI flows to the GCC countries for the period 2007-2015. Using panel data model and accounting for unobservable country effects, results show that cooperative labor employer relations, flexible hiring and firing practices, linking pay to productivity, and reliance on professional management encourage FDI flows to the GCC countries. Robustness checks show a positive influence of at least one dimension of labor market flexibility on FDI flows. This evidence lends support to the influence that flexible labor market policies have on FDI flows. The latter is perceived as key to income diversification in the GCC countries.