Effect of Foreign Direct Investment on Economic Development in MENA Countries: Evidence from a Dynamic Panel Analysis
DOI:
https://doi.org/10.66348/jefa.26.a104Keywords:
Foreign direct investment; Economic development; Human Development Index; Institutional quality; Human capital; Financial developmentAbstract
This study investigates the impact of foreign direct investment (FDI) on the economic development of MENA countries during the period 2000-2025, highlighting the importance of the role that quality of institutions plays in determining the effectiveness of foreign investment. The study adopts a panel econometric approach which controls for cross sectional dependence, mixed orders of integration, long run relationship and potential endogeneity and is conducted on a panel of economies of the MENA region. The main development measures are in the Human Development Index, and the main explanatory factors of development are FDI, human capital, institutional quality, openness to trade, financial development, infrastructure, inflation and natural-resource dependence. Fixed-effects estimation, cross-sectionally augmented autoregressive distributed lag (CS-ARDL), common correlated effects mean group (CCEMG) and augmented mean group (AMG) estimators are used in the empirical analysis. The result shows that the long run effect of FDI has been more positive and statistically significant, while the short run effect shows that the FDI positively affects the economic development but is not statistically significant. The human capital, institutional quality, financial development and infrastructure and trade openness also have positive impacts on economic development, while inflation and natural-resource dependence have negative impacts. Importantly, the relationship between FDI and institutional quality is positive and significant, which indicates that the better the institutions are, the better the development contribution of foreign investment can be. The robustness results are the same under alternative estimators and other measures of development and FDI. The main findings of the study are that FDI alone is not enough to maximize its developmental impact, but needs to be coupled with improving institutional quality, human capital, financial systems, infrastructure and economic diversification in the MENA countries if FDI is to be translated into sustainable and inclusive development.
Received: 2026-07-08 | Revised: 2026-09-28 | Accepted: 2026-09-29 | Published: 2026-09-30
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Consent to publish: The authors have provided consent to publish.
Competing interests: The authors declare no competing interests.
Data availability statement: Data will be made available on reasonable request from the corresponding author.
Funding: This research received no external funding.
Clinical Trial Number: Not Applicable.
Declaration of using generative AI: During the preparation of this work the author(s) used ChatGPT in order to correct the grammatical errors. After using this tool/service, the author(s) reviewed and edited the content as needed and take full responsibility for the content of the published article.
Author Contributions: S.D. and A.K.P.: Conceptualization, methodology, writing—original draft preparation, writing—review and editing. All authors have read and agreed to the published version of the manuscript.
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Data will be made available on reasonable request from the corresponding author.
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