Relationship between economic infrastructure and foreign direct investment within the framework of foreign aid in the MENA region

Abstract

The aim of this paper is to study the interaction between aid allocated to infrastructure and the actual level of that infrastructure; as well as the impact of such interaction on the net inflows of foreign direct investment to the Middle East and North Africa (MENA) region. In order to achieve this goal, the simultaneous equations model used in the study of Donaubauer, Nunnenkamp (2015) was partially modified to make it suitable for the conditions of the MENA region; and the three-stages least squares (3 SLS) method was applied. The study results reveal a strong positive impact of infrastructure on foreign direct investment. Raising by one point the economic infrastructure index leads to an increase of 6% to 7% of GDP in foreign direct investment inflows to the MENA countries. The various conducted robustness tests also prove that such impact is robust and stable. However, foreign direct investment inflows are only indirectly influenced by aid via the channel of the actual infrastructure level. At the sectors’ level, the infrastructure of the information and communications technology sector had the greatest effect on attracting foreign direct investment to the MENA region, followed way behind by the infrastructure of the transport sector, then by the infrastructure of the financial sector and finally the infrastructure of the energy sector.

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