The Effect of FDI on the Convergence of Economic Growth Through the Prospective of Institutional Quality in GCC Countries

Abstract

In the current study, we attempt to develop a model on how institutional quality aids economic growth convergence and FDI inflow in GCC countries using panel dataset spanning 1996 to 2016. We estimate growth convergence by deviating GDP growth rate of individual economy from its group average, emanating equation approximate ADF equation which was used for testing convergence in each economy. We found evidence of economic growth convergence in Saudi Arabia, Kuwait, UAE and Oman, while the economy of Kuwait and Qatar did not converge to the group average. The result of system GMM estimation shows that there is positive and significant relationship between FDI and economic growth in GCC economies, meanwhile, controlling for institutional quality produce mixed result because FDI negatively and significantly relates to FDI. We also found that FDI least contribute to the convergence of economic growth in GCC countries, while institutional quality produces positive and significant impact in converging growth in GCC economy. We therefore, recommend strengthening institutions as well as relaxing stringent rules that may hinder the activities of MNCs.