FDI Location Drivers and Risks in MENA

By Van Wyk, Jay; Lal, Anil K. | Journal of International Business Research, July 2010 | Go to article overview
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FDI Location Drivers and Risks in MENA


Van Wyk, Jay, Lal, Anil K., Journal of International Business Research


INTRODUCTION

This paper investigates the causes of FDI flows to the Middle East and North Africa (MENA). The subsequent analysis of foreign direct investment (FDI) in MENA intersects two approaches in International Business and International Economics. New Institutional Economics (NIE) investigates the locational determinants of FDI in host countries. Multinational enterprises (MNEs) have particularly targeted geographical regions for investment and operations to take advantage of regional economic integration.

Traditionally, macroeconomic factors have been regarded as the most important determinants for location decisions and investment activities by MNEs. These location factors include market potential and size, economic growth rates, income per capita, relative labor unit costs, exchange rates, inflation rates, and relative natural endowments (Cavers, 1974; Cheng & Kwan, 2000; Dunning, 1980). Primarily, following the seminal works of North (1981, 1990) and Rumelt, Schendel and Teech (1991), economists and international management scholars found macroeconomic factors may provide only a partial explanation of FDI location and that more attention should be focused on the influence of institutions on FDI decisions (Disdier & Mayer, 2004; Dunning, 2006; Hall & Jones, 1999; Henisz, 2000; Jensen, 2003; Knack & Keifer, 1995; Mauro, 1995; Mayer, 2001; Madambi & Navarra, 2002; Rodrik, Subramania & Trebbi, 2004; Sethi, Guisinger, Ford & Phelan, 2002). According to Wan and Hoskisson (2003), institutional theory extends transaction cost theory by adding the institutional dimension. In developing countries, institutions are particularly important because institutional immaturity or ineffectiveness raises transaction costs and risk levels for foreign investor (Child, et al., 2003; Mayer, 2004; Uhlenbruck, 2004). These dual determinants of FDI, macroeconomics and institutions, are now known as the New Institutional Economics approach to FDI. NIE can be defined as an expansion of macroeconomic determinants of FDI to include socio-political interactions and the evolution of institutions. Institutions, which may be seen as the rules of the game and their associated implementation mechanisms, can be both formal and informal and are developed endogenously in response to limitations in human capacity to process information (Sugden, 1986; Williamson, 2000; Zinnes, Eilat, Sachs,2001). NIE operates in terms of hierarchy, market and participation principles as manifested by the state, the private sector, and civil society (Williamson, 1975; Williamson, 2000, Picciotto, 1997). According to Lin and Nuggent (1995) NIE has been influenced by five strands of thought: theories of collective action, transaction cost economics, theories of the evolution of norms and rule-making, the economics of imperfect information, and property rights economics.

FDI flows to specific geographical regions or to host countries within geographical proximity have increased due to the larger markets created by economic integration (Buckley, Clagg, Forsans & Reilly, 2005; Lee, 2005; Mirza & Giroud, 2004). The commonalities of history, culture and geography have driven the formation of regional free trade agreements and regional political organizations. Hossain and Naser (2008), for example, indicate that the six Middle East countries which formed the Gulf Cooperation Council (GCC), historically had common religious, social and cultural identities. The GCC also serves as a political and economic policy-coordinating forum for its members. According to Abed (2003) MENA, countries share a common cultural and institutional heritage, along with common economic and social challenges. Regionalism occupies the space between the contradictory pulls of globalization and nationalism. Rugman and Verbeke (2004) showed that the operations of MNEs are more focused on regional rather than global markets. New Institutional Economics (NIE) is now increasingly regarded as a valid explanation of location factors determining FDI in regions as diverse as Latin America, Central and Eastern Europe, East Asia and Sub Saharan Africa (Grosse & Trevino, 2005; Trevino & Mixon, 2004; Manaim, 2007; Raminez, 2006; Zhang, 2001; Akinkugbe, 2005; Mengistu & Adams, 2007).

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