Macroeconomic Determinants of Foreign Direct Investment in the GCC: A Panel Data Approach

Abstract

This study investigates the impact of fiscal and monetary policy variables on foreign direct investment inflows in the Gulf Cooperation Council (GCC) countries, which include Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Bahrain, and Oman, utilizing panel data spanning from 2005 to 2023. The empirical analysis employs fixed effects and estimated generalized least squares panel regression models to address cross-sectional dependence and heteroskedasticity. Our analysis finds, among the macroeconomic indicators considered, only government expenditure demonstrates a statistically significant effect on foreign direct investment inflows, with a negative coefficient that supports the "crowding-out" hypothesis. This result suggests that higher levels of government spending may displace or deter private investment, including foreign direct investment. In contrast, other variables, including gross domestic product growth, inflation, interest rate differentials, exchange rates, and tax revenue, exhibit statistically insignificant effects on foreign direct investment, though the direction of their estimated coefficients remains consistent with established theoretical perspectives.

Keywords: Foreign Direct Investment, Government Expenditures, Macroeconomic Stability