Drivers of bilateral FDI inflows in North Africa region: a gravity model approach

Abstract

Purpose- This paper aims to explore the main determinants of bilateral foreign direct investment (FDI) and investigate the relationship between bilateral trade and FDI inflows in five North African countries with 25 investment partners. Methodology- The study employs a gravity model and pooled time-series-cross-sectional regression method, utilizing a 10-year average over the period 2001-2010, the significance of this research lies in its contribution to the existing literature as the first study to analyze the factors influencing bilateral FDI inflows between North African countries and their primary investing partners. Findings- The results indicate that bilateral trade, economic size, financial development, and common language of host countries are key drivers of bilateral FDI inflows between North African countries and other nations. Furthermore, the presence of a common language between host and home countries has a significant and positive impact on bilateral FDI. However, the distance between host and home countries has a negative effect on FDI. Conclusion- This paper concludes that foreign direct investment (FDI) between North Africa and other nations was influenced positively by the economic sizes of both the home and host countries while being negatively affected by the physical distance between them. Additionally, the results demonstrate that the presence of a common language and bilateral trade play crucial roles, with their effects being highly positive and significant. This suggests that FDI flows tend to be greater between North African countries and those with whom they already have substantial bilateral trade transactions. Furthermore, the study concludes that France, the United Arab Emirates, Spain, and Kuwait are the most significant investing countries in the North African region in terms of FDI, surpassing other nations. Keywords: Bilateral FDI inflows, bilateral trade, gravity model, North Africa, geographical and culture factors. JEL Codes: F14, F21, F40, F30, F15