In search of spatial interdependence of US outbound FDI in the MENA region

• Author: Anjum Siddiqui,Asim Iqbal
• Date: 01 May 2018
• DOI: http://doi.org/10.1111/twec.12571
• Published date: 01 May 2018

ORIGINAL ARTICLE

In search of spatial interdependence of US

outbound FDI in the MENA region

Anjum Siddiqui

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Asim Iqbal

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Department of Finance & Risk Management, Sulaiman AlRajhi School of Business, Bukairiyah, Saudi Arabia

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Department of Economics, University of Education, Lahore, Pakistan

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INTRODUCTION

While the own country FDI determinants have been extensively researched, there is no consensus

yet on which surrounding country factors are significant in affecting a host country’s FDI inflows.

Some previous studies on FDI in the MENA region have tested for own country determinants of

FDI (Mina, 2007; Mohamad & Sidripoulos, 2010). However, to our knowledge the spatial inter-

dependency of FDI in this region has not been examined. The rationale for testing FDI interdepen-

dencies in the MENA region is that it has almost half of the global oil reserves and produces one

third of the world’s petroleum. This makes it a prime region to study in terms of natural resource

endowment. It is also a region with relatively poor infrastructure development and generally lacks

democratic governments, which may be important factors in making MENA one of the lowest

recipients of FDI in the world. One would expect that just like the resource-rich Latin American

countries, resource endowment should also attract FDI in this region and those regional countries

with better infrastructure and governance structures should affect a MNE decision on where to

invest in MENA.

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Thus, we expect these variables to be spatially significant determinants of FDI

and their statistical significance remains an empirical issue worthy of examination.

Previous literature on FDI interdependency has employed the SAR methodology (Blanco, 2012;

Blonigen, Davies, Waddell, & Naughton, 2007; Garretsen & Peeters, 2009; Ledyaeva, 2009 and

Nwaogu & Ryan, 2014). However, Elhorst (2001), Regelink and Elhorst (2014), LeSage and Pace

(2009) and LeSage (2014) have criticised the SAR methodology and they assert that it gives

inconsistent results due to its use of point estimates and its incorrect weighting methodology to

account for spatial variables. This study acknowledges these criticisms by employing the spatial

Durbin model (SDM) of LeSage and Pace (2009) to test if macroeconomic factors, governance

and resource endowments as well as FDI inflows in those countries affect a regional host country’s

inbound FDI.

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Despite its abundant natural resources, the MENA region is poorly integrated and has not benefited much from globalisa-

tion. Amongst the many reasons cited are lagging political reforms, undeveloped financial and capital markets, high trade

restrictions and a large public sector, which has undermined entrepreneurship (Abed, 2003).

DOI: 10.1111/twec.12571

World Econ. 2018;41:1415–1436. wileyonlinelibrary.com/journal/twec ©2017 John Wiley & Sons Ltd

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Our results show the significance of some known own country determinants of FDI in the

MENA region. However, when we examined the spatial effects, we found that only the infrastruc-

ture in surrounding countries has a statistically significant impact on a host country’s FDI inflows.

Section 2 presents a selective literature review of earlier studies on determinants of FDI and

also the motives of MNE investments and the implication of various motives for spatial interde-

pendency of MNE investments. Section 3 shows the FDI trends in the MENA region and high-

lights the importance of US outbound FDI in the major sectors and the manufacturing industries.

Section 4 presents the methodology of the SAR and SDM models. Section 5 presents the data

sources and summary statistics. Section 6 compares the econometric results of both the SAR and

SDM models to determine the robustness of our findings on the “right”covariates of inward FDI

in the MENA region. Section 7 concludes.

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LITERATURE REVIEW

Currently, no study exists, which estimates the spatial determinants of FDI in the MENA region.

Arguably, the region has largely been ignored due to the fact that it has been and continues to be

one of the lowest recipients of world FDI. Below, we first present the empirical findings on spatial

interdependence and own country determinants of FDI followed by the theoretical justification for

the expected signs of the spatial determinants of FDI under various motives of MNE investments.

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Findings on FDI determinants

In a pioneering study, Blonigen et al. (2007) estimated a spatial SAR model for testing the inter-

dependence of US outward FDI in OECD countries and some high FDI recipient countries in Asia,

South America and South Africa. The results were found to be sensitive to the selected sample of

countries. They did, however, find that by including the surrounding market potential (SMP) vari-

able and the variable for the spatial lag of FDI, the omitted variable bias of panel regressions is

corrected. Blanco (2012) used a spatial 2SLS model with fixed-effects panel regressions and tested

for spatial interdependence of FDI in Latin American countries through SMP and the spatially

weighted FDI. She found that SMP has a positive effect on net world FDI in Latin America but

not net US outward FDI. However, she found that the spatially weighted FDI is not significant.

When the US FDI was used as an explanatory variable, the SMP was insignificant, but the spa-

tially weighted FDI was significant, thereby showing interdependence. Nwaogu and Ryan (2014)

found that US outward FDI into Africa, Latin America and Caribbean has evidence of spatial inter-

dependence and the result is robust to country heterogeneity and even after controlling for time

effects. On the basis of their results, they conclude that FDI into these countries is classified as

complex-vertical specialisation.

Regelink and Elhorst (2014) tested for spatial interdependence of US outbound FDI for 20

European countries. They criticise earlier spatial models of Blonigen et al. (2007) and others by

using a different econometric technique incorporating the direct and indirect effects of the interde-

pendence variables, namely SMP and the weighted FDI. They found evidence for the export plat-

form and pure vertical FDI motives. Ledyaeva (2009) found that oil and gas resources and

legislative and political risks are statistically significant determinants of FDI in Russia for the tran-

sition period 1995–2005. She also found evidence of spatial effects of a neighbouring state’s FDI

such that if a neighbouring state offered relatively better advantages, its FDI inflows would

increase and that of other states would reduce.

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SIDDIQUI AND IQBAL