Foreign Direct Investment, Absorptive Capacity and Growth in the Arab World

Signe Krogstrup and Linda Matar ()
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Linda Matar: UN-ESCWA, Beirut

No 02-2005, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: Arab countries have been performing very poorly in attracting FDI inflows relative to other developing countries since the early 1990s. Arab countries might hence be missing out on growth and development, if FDI is associated with positive externalities. The recent empirical literature on FDI and growth shows, however, that the latter is not always the case, and that FDI is more likely to have positive externalities in countries with a certain level of absorptive capacity for FDI. This paper looks at FDI and growth through absorptive capacity in the Arab world, given the available data on four different aspects of absorptive capacity: the technology gap, the level of workforce education, financial development and institutional quality. The results turn out to be highly sensitive to the specific measure of absorptive capacity used, but one conclusion is unambiguous. It is unlikely that the average Arab country currently stands to gain from FDI. As a consequence, costly financial incentives to attract more FDI might hence be wasteful, if not welfare reducing in Arab countries.

Keywords: Foreign Direct Investment; Growth; Regional Integration; Middle East; Arab Countries (search for similar items in EconPapers)
Pages: 22
Date: 2005-05
New Economics Papers: this item is included in nep-cwa and nep-int
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Citations: View citations in EconPapers (11)

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