Munich Personal RePEc Archive

The role of political instability and corruption on foreign direct investment in the MENA region

Aloui, Zouhaier (2019): The role of political instability and corruption on foreign direct investment in the MENA region.

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Abstract

The interest of this paper is to show the influence of political instability and corruption on foreign direct investment and its different effects among MENA countries. Political instability and corruption are highlighted as a risk factor for the foreign investor who generates several costs for economic activity and remains a major determinant of FDI. The combination of political instability and corruption contributes to the revolution in these countries such as Tunisia, Egypt, Libya and weak economic integrations in general explain the low attractiveness of MENA countries for foreign investors. It is widely argued that good governance is an important factor of FDI. With the exception of studies of corruption, however, empirical research on the link between governance and FDI is limited, particularly in the context of MENA countries. Corruption and political instability are the governance indicators that seem to have the greatest impact on foreign direct investment (FDI). An increase in FDI has the greatest effect on development in politically stable regimes. Studies of corruption and its relation to foreign direct investment (FDI) have yielded mixed results; some have found that corruption discourages FDI, but others have found the opposite. The study covers the MENA region for the period 1996-2016. Using the panel data technique and the results obtained indicate a negative relationship between political instability and foreign direct investment and between corruption and FDI.

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