Academic journal article Journal of International Business Research

Oil and the Location Determinants of Foreign Direct Investment Inflows to Mena Countries

Academic journal article Journal of International Business Research

Oil and the Location Determinants of Foreign Direct Investment Inflows to Mena Countries

Article excerpt

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Foreign Direct Investment (FDI) plays an important role in the expansion of the economies within developing countries. There has been an increase in world FDI flows in 2011, up by 16% as compared with 2010. It was caused by the high profits of a number of Transnational Corporations (TNCs) and high economic growth in developing countries. This accounted for 45% of world FDI in 2011, which was about $684 billion.

The nationalization of the petroleum industry occurred for the first time in 1917 in the Russian Revolution; later on, nationalization occurred in Bolivia, Mexico, Venezuela and Iran; and during the 1960s, nationalization of oil and gas took place in five countries: Argentina, Burma (Myanmar), Egypt, Indonesia, and Peru. About a decade later, in the 1970s, nationalization had finally reached Algeria, Iraq, Kuwait, Libya and Nigeria, along with a slight rise in the Saudi holding of the company Aramco. There is vast empirical literature on the determinants of FDI inflows into developing countries (Ezeoha & Cattaneo, 2012; Onyeiwu & Shrestha, 2004; Asiedu, 2002, 2006; Solomon & Ruiz, 2012; Busse & Hefeker, 2007; Naude & Krugell, 2007; Sekkat & Varoudakis, 2007; Khadaroo & Seetanah, 2009). However, only a few studies focus on the determinants of FDI inflows in the MENA region (e.g. Hisarcikilar et al., 2006; Mohamed & Sidiropoulos, 2010; Moosa, 2009).

The factors may include the oil extraction (oil production), oil exploration (oil reserves), and a combination of oil extraction and oil exploration: oil relative production. These factors have not been presented in the literature on MENA region in the past. Furthermore, FDI in natural resource-rich countries tends to be concentrated in the natural resource sector. However, natural resource exploration requires a large initial capital outlay and the continuing operations demand a small cash flow. Consequently, FDI may be staggered after the initial phase (Asiedu & Lien, 2011).

The main contributions of this study were threefold. It is the first study of FDI inflows to the MENA countries linking together the effects of oil processing in three approaches, in the same way as Mina (2007a) tested in the model on GCC countries. Secondly, it is the first study to analyze the interaction between investment profiles as a proxy for institutional quality; it employs natural resources as explanatory variables by adding the interaction term between both in the FDI inflow regression. The aim is to determine how the total effect of investment profiles on FDI inflows is affected by natural resources. In fact, there is only one study of the joint role of the interaction between democracy and natural resources (Asiedu & Lien, 2011). Finally, given the importance of FDI in the MENA region, the following questions have been addressed:

1. How important are natural resources in directing foreign direct investment (FDI) flows to the MENA region?

2. Where are the location determinants for foreign direct investment (FDI) into the MENA countries?

3. Do natural resources alter the relationship between institutional quality and foreign direct investment (FDI) ? Or do natural resources mitigate the positive effect of institutional quality on FDI?

The study aimed to contribute to the existing literature by attempting to prove the Location dimension of Dunning's (1981) Ownership-Location-Internalization (OLI) paradigm on the determinants of FDI in MENA countries. The study empirically examined the influence of oil, openness to trade, market size, inflation rate, infrastructure development, human capital, and institutional quality in host countries on FDI flows. Panel data was used to analyze the research questions for the 17 MENA countries between 1960 and 2012.

Recent Trends in FDI

In absolute terms, global FDI flows grew over a year, rising by 29% to $916 billion in 2005, compared to 27% in 2004 (UNCTAD, 2006). …

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