Foreign direct investment, capital outflows and economic development in the arab world

Abstract EN

There is some controversy about the role ot Foreign Direct Investment (FDI) in the capital formation of developing countries Some analysts have suggested that rather than mobilizing scarce capital for developing countries, FDI "decapitalizes" these countries by inducing excessive capital outflows.

Despite the widespread acceptance of this claim, there is little systematic and empirical evidence that supports this notion, particularly from the point of view of the Arab world.

This paper seeks to fill this vacuum by evaluating F Dl outflows from the Arab world during the 19/0s to the 1990s.

In view of the wide variations in the extent and patterns of capital outflows from individual Arab countries, the paper investigates the macroeconomic determinants of capital outflows from the region.

Using panel data from ten Arab countries, and the Seemingly Unrelated Regression technique, the following variables are found to have some influence on capital outflows from the region: exchange rates, the growth rate of real GDP, interest rates, the rate of inflation and net foreign assets.

Specifically, currency depreciation and an increase n the rate of interest are found to be negatively correlated with capital outflows, while an increase in the rate of inflation in the previous year increases capital outflows in the current year.

Surprisingly, increases in the rate of economic growth and net foreign assets tend to precipitate capital outflows from the Arab world.

The paper finds anecdotal evidence that suggests, contrary to conventional wisdom, that capital outflows have no negative effect on economic growth in Arab countries.