Under Which Condition Does the Democratization of the Arab World Improve FDI?
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Under Which Condition Does the Democratization of the Arab World Improve FDI? Nouha Bougharriou1 · Walid Benayed2 · Foued Badr Gabsi3 Accepted: 21 October 2020 © Association for Comparative Economic Studies 2020
Abstract This paper examines the relationship between democracy and foreign direct investment (FDI) in the Arab World over the period 2002–2013. The results show strong evidence of an inverted U-shaped relationship between democracy and FDI. This means that democratization should only be FDI-fostering if a country is not sufficiently democratic. In an attempt to explain these findings, we show that the asymmetric effects of democracy on FDI stem from the U-shaped democracy–taxation path. That is, at earlier stages of democratization, democracy is associated with lower taxation levels, which promotes FDI. However, when a certain level of democracy is reached, a deeper democratization would increase taxation, which hampers FDI. Hence, a moderate improvement in political and civil freedoms seems to be a key prerequisite to attract more FDI in authoritarian Arab countries. Keywords Democracy · FDI · Taxation · Nonlinearities · Arab World JEL Classifications H20 · F23 · P16
* Nouha Bougharriou [email protected] Walid Benayed [email protected] Foued Badr Gabsi [email protected] 1
Faculty of Economics and Management of Sfax, University of Sfax, Airport Road Km 4, BP 1088, 3018 Sfax, Tunisia
2
Higher Institute of Management of Gabes, Gabes, Tunisia
3
Faculty of Economics and Management of Sfax, Sfax, Tunisia
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Introduction The Arab region seems to be lagging far behind in terms of FDI attractiveness (UNCTAD 2003; Mohamed and Sidiropoulos 2010). Although the world FDI flows have known a huge surge as an outcome of globalization, the FDI flows to Arab region remain relatively low compared to other regions. In addition, these flows have witnessed a sharp decline as a result of the 2008 global financial crisis. The situation has even worsened with the eruption of the Arab Spring event in late 2010 and early 2011. This juncture has eroded investors’ confidence and has led to a drop in FDI flows to the Arab region (Abdel-Latif 2019). These facts lend importance to the investigation of how the quality of political institutions, more precisely, how the improvement in democracy in the Arab world would affect foreign investors’ decisions. Obviously, several studies have recently focused on analyzing the political determinants of FDI, suggesting that political factors might be even more relevant to foreign investors than economic ones. Nevertheless, the debate on which political environment is more conducive to foreign direct investment still remains far from being conclusive. Interestingly, the existing literature identifies three competing hypotheses when analyzing the effects of political regimes on FDI. In fact, existing empirical evidence suggests that the effect of democracy on FDI could be positive (Jensen 2003; Busse and Hefeker 2007; Li 2009), n
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