Financial Market Development as a Driver of Foreign Direct Investment: Evidence from MENA Region

Abstract

This study, which utilized the Panel ARDL model on data from 12 MENA countries spanning the period 1990–2021, intends to examine the effects of financial market evolution on flows of foreign direct investment (FDI). The results confirmed a strong, long-term equilibrium between the variables. In the long term, financial market development and economic growth are the primary drivers to draw in FDI, with improvements in the financial index leading to a 41% increase in FDI. Conversely, the short-run impact shows significant heterogeneity; the majority of countries do not respond to immediate changes, while the United Arab Emirates (UAE) represents the sole exception, where all variables positively and instantaneously affect FDI. The study recommends the necessity of continuing structural reforms to deepen financial markets as a strategic priority for ensuring sustainable FDI flows.