Foreign direct investment in the MENA region: is there a colonisation memory effect?

Abstract

Despite efforts to convert from inward-looking economic development strategies to export-promoting alternatives, the Middle East and North African (MENA) region still endures relatively slow growth and high unemployment. Lower trade barriers, privatisation of many industries, and reform of its foreign exchange markets have attracted only modest foreign investment expenditures to the region. Such an outcome may reflect low receptivity levels among MENA members toward investments of multinational enterprises (MNE). Using panel data, this study analyses foreign direct investment (FDI) behaviour in 16 MENA economies over the 2000–2005 period. In particular, the study examines a long-term ‘colonisation memory effect’ on recent foreign investments in the MENA region. Colonisation memory, measured by the temporal proximity of a country's colonised era, may foster anti-MNE sentiments if foreign firms are perceived as exploitative, thus adversely affecting foreign investments in these countries. The statistical results indicate that variations in FDI net inflows and long-term colonisation memory are inversely and significantly correlated. Other important results indicate that variations in real income, international trade openness, and efficiency-seeking investment behaviour show a direct relation with MENA's FDI variations. Variations in hydrocarbon endowment, growth in aggregate output, and the region's foreign exchange markets also have an adverse effect on MENA's net inflows of foreign investments.