FDI in MENA : Impact of institutional environment and … FDI in MENA : Impact of institutional...

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FDI in MENA : Impact of institutional environment and violence1

Federico Carril (Universidad de Granada, Spain) [email protected] Juliette Milgram Baleix (Universidad de Granada, Spain) [email protected]

Jordi Paniagua(Catholic University of Valencia, Spain) [email protected]

PRELIMINARY VERSION

Abstract This study focuses on greenfield investments in Middle East and North African countries

(MENA) for the period 2003-2012. We estimate augmented gravity equations to measure the impact of business and political environments on FDI flows. We find that the failures in host countries’ institutions affect the extensive margin of GI inflows more than the volume of these flows but violence has not a clear significant impact. Though, the institution-FDI relationship differs depending on the development level and the natural resources hold by the host country. First, violence seems to have a larger negative impact for MENA than for the rest of the world. Second, MENA countries would benefit much more from rule of law improvements than the rest of the world. In contrast, improvements in the business freedom would not clearly increase FDI in MENA. Third, an improvement in the quality of institutions in MENA oil-producing countries would attract greenfield invetsments while it would not in the other MENA.

Key words JEL code: FDI, MENA, violence, political environment, instutions.

1 This study benefits from the financial supports of FEMISE (project FEM41-07). The authors would like to acknowledge the useful collaboration of Angel Fernández in gathering data from several sources.

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Introduction Foreign Direct Investment (FDI) could be an opportunity to increase capital ressources of

emerging countries. Many Middle East and North African countries (MENA) countries face a political transition process and a a trade liberalisation process in the framework of the EU-Med agreements. This context makes even more important to attract foreign investment in order to equilibrate balance of payment. Moreover, FDI represents a source of much needed employment and private sector development in the region.

There is a conventional wisdom that concomitant liberalisation of trade and investment regimes, accompanied by creating a congenial environment for market-based decision making by the private agents, is vital to attract FDI. Then, little has been told about how the political reforms affect the volume (intensive margin) and number (extensive margin) of foreign investments. In particular, the banking crises and the Arab Spring may have affected both the number of investments across borders and the amount invested. How to attract FDI is a very important issue for policy makers in these countries.

This study aims at providing an assessment of the role played by political and business circumstances on Greefield investments in MENA countries. In particular, we focus on the comparison between MENA countries which are oil-abundant and those which are not.

To this aim, we use data on Greenfield Investments from FDI Markets that contains information about the number and volume of projects by source and destination countries all over the world for the period 2003-2012. We estimate several augmented gravity equations to measure the impact of business and political environments on FDI flows.

We review in section 1 the theoretical and empirical background. Section 2 presents our empirical strategy. Section 3 comments the results. Finally, we include some preliminary conclusions.

Theoretical and Empirical Background

Democracy

According to North (1990), institutions represent “the rules of the game” that shape social interactions and, in particular, economic behavior of agents. These rules may be embodied in formal or informal laws. The political system a country has, the degree of democracy or autocracy, is probably one of the main aspects that shape its institutions (Jensen, 2008). Lack of democracy, as well as inequality, boosts social tensions that increase the likelihood of bringing severe political and social crisis to a country (Alesina & Perotti, 1996; Joffé, 2011; Taleb & Blyth, 2011). In this line, Jensen (2008) shows that the lack of democracy increases the likelihood of expropriation/breach of contract risk. Moreover, the autocrat ruler has an incentive to exploit its position for extracting as much as possible from society’s surplus for its own benefit. Consequently, in the long run, autocracies are less likely to respect law, private property rights and being transparent when it comes to politics and policy (Jensen, 2008; Olson, 1993). Also, due to lack of control they are more prone to bring more inefficient policies and outcomes (Adam & Filippaios, 2007). These aspects result in a less convenient environment for conducting productive and value added activities. Thus, we expect the degree of democracy to have a positive impact on FDI. However, there are also mechanisms through which democracies may imply institutional risks for firms. Change of governments and policies, lobby from local firms towards protectionism or voters’ interests might not always be aligned with MNEs ones’, while an autocratic government can hold a better position to offer favorable treatment to foreign investors (Jensen, 2008; Li & Resnick, 2003; Oneal, 1994). Additionally, some authors like Rodrik (1996) have argued a strong and autonomous government might be more successful at applying some favorable economic reforms.

A strand from the reviewed empirical literature provides supportive evidence towards a positive relationship between democracy and FDI inflows (Asiedu & Lien 2011; Busse & Hefeker, 2007; Farazmand & Moradi, 2014). However, opposite conclusions have also been reached as well as non-significant relationship by others (Li & Resnick, 2003; Mathur & Singh, 2013; Oneal, 1994; Paniagua & Sapena, 2013, 2014). Adam & Filippaios (2007) for FDI from USA find that civil liberties in the host country have a negative non-linear relationship on these flows while

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political liberties attract them. Authors argue that under certain conditions, like efficiency or natural resources seeking, slight civil repression might be preferred by MNEs. Moreover, for USA FDI outflows into developing countries, Oneal (1994) finds a positive relationship between the degree of autocracy and corporate profits. Similarly, Paniagua & Sapena (2013) provide evidence of a negative relationship between foreign employment and the degree of democracy. For a sample of developing countries, similar results are reached for FDI inflows by Li & Resnick (2003) and Mathur & Singh (2013).

The MENA region is highly undemocratic, as reported in Table X1, their average polity2 index is more than eight points below the world’s average and almost seven points below the one of the rest of developing countries. During the considered period, the sole MENA that can be considered a full democracy is Israel. To our knowledge, the number of studies looking into the effects of democracy on FDI in the MENA region are scant. One exception is the work by Onyeiwu (2003) who finds a non-significant relationship between political rights and FDI.

Quality of Institutions

In a more specific way, the literature has highlighted the role of the quality of institutions for private economic activity in general, and for the attraction of FDI in particular. Several aspects determine the institutional quality from countries. One of these elements is the Political risk that refers to government's stability and, in consequence institutions' stability. Instability is expected to deter FDI since risk associated with the investment increases as far as multinationals are likely to face sudden changes in the environment they operate in. Particularly sudden changes in laws or risk of expropriation may deter FDI (Bénassy-Quéré et al., 2007; Busse & Hefeker, 2007; Méon & Sekkat, 2004). As shown by Alesina & Perotti (1996), political instability reduces investment, and therefore growth. In this way, investors are likely to prefer stable governments, clear compliance of rule of law and strong protection of property rights (Olson, 1993). Investors, and especially foreign investors, will seek a system that fully guarantees a stable environment and allows them to develop in a continuous manner their economic activity in a country. Additionally, low quality institutions are prone to represent extra costs for firms through corruption or high load of arbitrary bureaucracy (Wei, 2000).

This issue is likely to be even more significant when local ruling power feels threaten by private and/or foreign investors. Private investors might dilute governments’ degree of power, and have interests not aligned with the local ruling oligarchy. This aspect is especially relevant for the MENA region, where patronage networks are common and strong private sector is an exception (Dillman, 2001; Malik & Awadallah, 2013). Méon & Sekkat (2004) show that institutions' functioning may have disabled a greater participation of the Middle East and North Africa (MENA) in the world economy. In this line, they suggest to complement openness strategies with institutional reforms in order to improve MENA countries performance. Otherwise, most MENA countries’ institutional idiosyncrasy is prone to undermine potential benefits to be obtained from economic policy.

The findings regarding the relationship between specific aspects of institutions´ quality and FDI have not been unanimous, but overall it appears to point towards a positive relationship between both. For instance, Asiedu (2002) finds that political stability has no significant impact on FDI in developing countries. Busse & Hefeker (2007) find that several institutional variables2 that measure political risk are relevant determinants of FDI. Wei (2000) shows that corruption does have a negative impact on FDI. Same conclusion is reached for five Asian countries by Farazmand & Moradi (2014) and Mathur & Singh (2013). Though, Egger & Winner (2005) and Adam & Filipaios (2007) reach opposite results while Asiedu & Lien (2011) do not find conclusive evidence for the role played by corruption, but do show that bureaucracy, lack of rule of law and expropiation risk prevent FDI. Paniagua & Sapena (2014) provide evidence of a positive relationship between greenfield investments and less developed countries legal rights, while for developed countries a small but negative and significant relationship is reached.

For the case of MENA countries Méon & Sekkat (2004) do not find a significant relationship between FDI and corruption, although their results do show a negative relationship with political instability. For the same region, Rogmans & Ebbers (2013) show that environmental risk index has a non significant impact for their whole and first period of regression (1987-2008, 1987-1997), while in the second period (1998-2008) results indicate that risk has a positive impact on

2 Government stability, internal and external conflicts, rule of law, ethnic tensions, bureaucratic quality, corruption and democratic accountability are found as significant determinants of FDI.

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FDI. For Yemen, Musibah et al. (2015) show that political stability significantly boosts FDI inflows. Helmy (2013) studies the effect of corruption on FDI inflows in MENA and concludes that the degree of openness and freedom of the economy are the real stimulants of FDI in MENA. Asghari (2012) founds that a decrease in the environmental regulations stringency has positive and statistically significant effect on the FDI inflow to euro-Mediterranean countries during 1980-2010.

Violence

Violence is closely related to the state, institutions and income (Besley & Persson, 2014): the lower the quality of institutions and the economic development, the larger the income inequality, the more likely to suffer from violence a country is. These country’s failures are expected to discourage foreign investors. As pointed by Olson (1993), a society needs to enjoy peace in order to be able to prosper. Moreover, violence is one of the components that determines the grade of political risk of a country (Busse & Hefeker, 2007) and might directly restrict the firms’ capacity for developing their economic activity in a profitable way (Abadie & Gardeazabal, 2003; Jensen, 2008). Additionally, as it happened during the Arab Spring, social revolts might bring institutional changes to a country. As pointed by Brunetti & Weder (1998), institutional uncertainty is prone to have a negative effect on FDI.

This aspect has particular importance for the case of MENA countries, as it is a region which particularly suffers from it. In this line, Méom & Sekkat (2004) pointed that in the past there have been cases in which FDI into the region was sensible to political turmoil. We posit that not only major violence episodes, like terrorism, in a country might negatively affect FDI (Abadie & Gardeazabal, 2008), but also what occurs in neighbor countries. On one hand, major violence episodes from one country might have a negative impact on neighbors by making the region more unstable and less economically attractive. On the other hand, it is also possible that instability in neighbor countries might direct FDI into more stable countries from a region. Paniagua (2011), who considers the determinants of greenfield investments at the world level, finds evidence supporting this last hypothesis.

The latest outcome brought by bad quality of institutions in MENA is the Arab Spring, which it had a larger impact in Tunisia, Egypt, Libya, Syria, Yemen and Bahrain (Campante & Chor, 2012; Goizard et al., 2016). Protests spread into other countries, and even pushed some governments to enact reforms like in Algeria and Morocco in order to counteract social unrest (Joffé, 2011). Social revolts demanded democracy, lower corruption and work opportunities. In fact, most of these countries have been characterized by an increase of human capital quality together with a high unemployment and low wages (Campante & Chor, 2012; Joffé, 2011; Méon & Sekkat, 2004). High unemployment has particularly affected the young population. Moreover, corruption, lack of democracy, poverty, absence of the private sector and rents seeking by the ruling class has been a norm across these countries. These factors fueled the Arab Spring (Joffé, 2011; Malik & Awadallah, 2013), which brought a surge of riots and violence into the region.

When it comes to the impact of violence, most studies do find that terrorism, and internal and external violence do have a negatrive impact on FDI (Abadie & Gardeazabal, 2008; Bandyopadhyay et al., 2013; Blomberg & Mody, 2005; Busse & Hefeker, 2007; Enders & Sandler, 1996). Paniagua (2011) finds a positive relationship between neighbour countries´violence and FDI. In contrast, some works do find a surprising positive impact of violence and government inestability on FDI inflows (Asiedu & Lien, 2011; Blomberg & Mody, 2005).

Ease of doing business

The ease of doing business is another relevant pull factor of FDI which is closely related with institutions; while previous indicators capture macroeconomic characteristics, this one reflects a important aspects of the microeconomic enviornment that may be taken into account by foreign investors. It refers aspects such as the availability of credit, ease of starting a business or enforcing a contract (Bayraktar, 2013). These aspects haven’t been considered empirically by the literature until recent years. The studies of Djankov et al. (2002) and Djankov (2009) clearly demonstrate the role played by these microeconomic enviroment. After that, policy makers have started to take into account in their policy agenda.

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In the present study, we measure these aspects by the number of days and procedures needed for starting a business. We expect a negative relationship between these variables and greenfield investment. The number of days required is likely to reflect direct and indirect costs a company may face, by delaying the beginning of its economic activity. There is a cost of not doing business. The number of procedures may represent a mechanism through which politicians and bureaucrats may extract rents illegally (Djankov et al., 2002; Shleifer & Vishny, 1993). We believe this last issue could be significant for developing countries which do not enjoy transparent legal system. Actually, Treisman (2007) shows that the number of days for starting a business is a significant explanatory variable of corruption3.

On this aspect, Agosin & Machado (2007) present evidence that liberalizing approval procedures and lifting requirements that foreign companies enter into joint ventures with domestic firms encourage FDI. Jayasusiya (2011) shows that improvements in the Ease of Doing Business ranking from the World Bank attracts FDI on average. Nevertheless, the author does not find that countries performing large reforms on this ascpect attract more FDI. Also, they find this relationship insignificant for the case of developing countries. Carcoran & Gillanders (2015) finds that better position in the doing business ranking from the World Bank attracts FDI. Then, by distangling the index, authours find that trade regulation is probably the most important factor for foreing investors. Similar result is reached when they consider the number of US firms abroad. However, when they consider the volume of sales and assets no sigificant relationships are reached. Then, when they distinguish among countries acording to their development levels, they find that the positive impact is only significant for middle income countries.

Natural resources

The presence of natural resources in the host country may alter the relationship between FDI and the preferable political system for FDI. As suggested by Asiedu & Lien (2011), there are two aspects that may favor autocratic governments. First, MNEs in the extractive industry are more likely to be interested with long term stable governments. They might be less welcoming to frequent changes of governments. Second, authors suggest that natural resources are usually under a close supervision from the government. Good relationships with them increases the likelihood of accessing such resources. The necessary ties through time might be easier to develop with a long term government. However, the presence of natural resources and lack of democracy may also be accompanied by bad institutions’ quality, and deter FDI. For instance, Bhattacharyya & Hodler (2009) present evidence that natural resources foster corruption when countries are not fully democratic.

Asiedu & Lien (2011) provide evidence that, overall, abundance in natural resources has a negative impact on FDI, and undermines in more than 80% the positive effect of democracy. Then, for 10% of their sample they find that democracy has a non-significant effect or even deter FDI. Similarly, the presence of natural resources may impact the role played by Institutions. Aleksynska & Havrylchyk (2013) distinguish between developed and developing countries investors; they find that bad quality of institutions has a negative effect on FDI, in general. For FDI from developed countries, the negative effect of bad quality institutions applies regardless the presence of natural resources in the host country. For FDI from Developing countries , the negative impact of institutions on FDI inflows is lower when the host country is abundant in natural resources. As we comment in the next section, Amighini et al. (2013) find that overall Chinese outward FDI is attracted by political stability, but also finds that when the host country holds natural resources, political stability has the opposite effect.

To our knowledge, none studies have considered how the way institutions’ quality affects FDI into MENA countries depending on the abundance of the country in natural resources. For natural resources, Onyeiwu (2003) finds an insignificant relationship between the intensity of fuel exports and FDI inflows. Rogmans & Ebbers (2013) present evidence of a negative relationship between oil and gas production, and FDI. They suggest that oil producing countries are less open to FDI inflows.

In sum, the literature tends to demonstrate a robust influence of institutions on FDI. However, this relationship seems to be complex. Institutions’ impact depends on the host countries’ degree of development and whether they hold natural resources or not. Several 3 In fact, the correlation matrix shows that the negative correlation with lack of corruption is higher in the case of the number of procedures than in the case of the number of days needed for starting a business. Similar patterns are found when other institutional variables are considered.

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works support the hypothesis that the degree of democracy has a positive impact on FDI, nevertehless for developing countries results are not so conslusive. Moreover, aspects reflecting a bad quality of institutions such as corruption, political inestability, and lack of rule of law or property rights have a negative impact on FDI. Overall, the literature reaches the same conclusion for violence. While, the existing scant evidence suggests that the presence of natural resources might undermine the positive impact brought by good quality of institutions. At microeconomic level, the reviewed studies points that the ease of doing business should facilitate FDI. However, no robust evidence is provided in the specific impact that the ease of starting a business might have. In addition, it points that the potential benefits brought by improving this index might differ according to the countries’ level of development. For the particular case of the MENA region, we find that studies that consider it are scarce and the existing ones consider a reduced number of institutional factors.

Empirical strategy

Data

We use an original dataset that goes beyond the data available in international databases. Data has been taken from the Financial Times Ltd. cross-border investment monitor FDI Markets (FDI Markets, 2011). It includes data both for Greenfield investments and reinvestments (RFDI) desegragated by countries of origin and destination and by activities. The database includes both the number of projects, the volume of the projects and employment of all these flows. Our sample includes 161 countries and 10 years. Data are disaggregated by countries of origin and destination.

In our study, we consider as MENA the clasification of the World Bank. Acording to World Bank, MENA include: Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, West bank and Gaza, and Yemen. Though, West bank and Gaza is not included in FDImarkets Database. Then, we end up with 19 countries. Then, for classifiying the rest of the world we follow UNCTAD’s classification. We include as developing countries those that according to UNCTAD are developing, less developed and trasition countries. In this way, the country classification used is the following: Developed countries, MENA countries and other developing countries.

Empirical model

We estimate a conventional gravity model to explain FDI (baseline model) in a first step. This model will allow to disentangle the role played by standard economic factors like demand and supply, cultural, historical and geographical distances, bilateral investment and trade agreements when explaining these flows at the world level. The empirical model is the following:

FDIijt=exp(β0 + β1(GDPit * GDPjt) + β21ln(Dij) + β32ln(contigborderij) + β43ln(colonyij) + β54ln(langij) + β65ln(smctryij) + β76ln(relij) + β87ln(comcurij) β9FTAijt + β108BITijt + β9FTAijt+ β10(GDPit * GDPjt) λi + λj + λt + eijt

In order to obtain a robust and useful benchmark, we estimate first a base line model for the whole sample that is, for all bilateral FDI flows among the 160 countries during the period 2003-2012. Results of the base line model are as follows respectively for FDI_volijt: value of projects in millons dollars between home country i and host j in year t and for FDI_nbijt, the number of projects:

FDI_volijt=exp(- 6.868*** + 0.553***(GDPit*GDPjt) - 0.328***ln(Dij) + 0.085ln(borderij) + 0.428***ln(colonyij) + 0.538***ln(langij) + 0.599*ln(smctryij) + 0.284ln(relij) -0.045BITijt + 0.061FTAijt+0.553*** (GDPit * GDPjt) -6.868***

FDI_nbijt=exp(-14.838*** + 0.687***(GDPit * GDPjt) -0.365***ln(Dij) -0.097ln(borderij)+ 0.568***ln(colonyij)+ 0.505***ln(langij)+ 0.635***ln(smctryij)+ 0.024ln(relij) + 0.056BITijt+0.180**FTAijt+0.687*** (GDPit * GDPjt) -14.838***

The variables are defined as follows: GDPit and GDPjt are the GDPs of home and host countries, respectively; Dij is the distance in kilometres between country capitals; contigij (Contiguity) is a dummy that indicates whether a pair of countries share a common border; colij

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(Colony) is set to one if the two countries have ever had a colonial link; langij (Common language) takes positive value if both countries share the same official language; relij (Religion) is a composite index which measures the religious affinity between country pairs with values from zero to one; smctryij (Same country) indicates if both countries were part of the same country in the past; FTAijt (Free trade agreement) is a dummy that indicates if both countries have a free trade agreement in force; BITijt (Bilateral investment treaty) is a dummy that takes a value of one if the country pair has a bilateral investment treaty in force; FTAijt (Free trade agreement) is a dummy that indicates if both countries have a free trade agreement in force; lastly eijtrepresents an stochastic error term.

Results tend to show that determinants of the intensive (volume) and extensive (number) margins are quite similar: trade costs proxied by distance have a significant negative effect, there is no specific incentive neither disencetive to invest in neiborhood (ContiguityBorder has no significant impact); Sharing the same religion neither influences FDI flows at the world level; historical and cultural ties like having shared the same country or having had colonial relations or sharing the same language do influence posively FDI; BIT fail to influence FDI flows in general which can be viewed as a challenging results for policy makers: initially it may suggest that the content of BIT does not seem to fit with the needs of investors.

We run three alternative estimations of the baseline model using different fixed effects (FE)4.To hedge estimation bias due to zeros in the database, we follow Silva and Tenreyro (2006) and estimate FDI counts and flows with the poisson pseudo maximum likelihood (PPML) method.

Though, in order to capture the impact of the political variables which vary by host country i and year t, we have to focus on the model with fixed effect for each destination countries (λi), each source countries (λj) and each year (λt) separately.

In a second step, we estimate several augmented gravity equations to asses the impact of business and political environments adding to the baseline model several indicators.

Data overview

We study the impact of different indicators of institutional environment at the macroeconomic and microeconomic levels on FDI. In this section, we present an overview of the indicators we have selected. We present their main statistics by country groups: MENA, Rest of developing countries and Developed countries. Table 1, Table 2, Table 3 and Table 6 provide some summary statistics of the variables used. Sources and expected sign are displayed inTable 4, and Table 7 includes a correlation matrix 5.

FDI in MENA

For MENA countries greenfield investments play a dominant role over FDI. In all countries but Israel, greenfield investment projects represent more than 60% of the total FDI investments. As illustrated by Map 1, the main greenfield receptors during 2003-2012 are Saudi Arabia followed by United Arab Emirates (UAE), Turkey and Qatar. Egypt also receives considerable flows of GI. In terms of GDP, Tunisia, Lybia and Oman are the countries for which GI represent a higher share, followed by Algeria, Egypt, Iraq, and Jordan. In terms of projects,

4 FDI C&Y FE : Fixed effect for each destination countries (λi), each source countries (λj) and each year (λt) separately. Here, we assume that the resistance in FDI flows specific to each host and home countries is independent of time that is, it is static all over the period while conjecture affects all countries in the same manner. (1) FDI C*Y : Fixed effect for each destination countries (λiT), and period and for each source countries and period (λjT) on one hand, and for years on the other hand (λt). Periods T refer to three years periods 2003-2005, 2006-2008, 2009-2012 which covers 2009’s trade collapse. Here, we assume that the resistance in FDI flows is more structural, that is, it is dynamic over the period. (2) FDI C*&Y FE : Fixed effect for each destination and year (λit), and for each source and year (λjt). Here, we control for any variable specific to the host or the home country whichy varies among years (like GDP for instance) apart from any unobservable factors varying across time, at the country level that may push out or pull in for FDI. This includes the multilateral resistance to FDI following the proposal of Anderson y van Wincoop, (2003) for trade. 5 For estimation purpose, we use the logarithm form of these variables in the estimations. Previously, we convert the indicators in order to obtain positive values larger than 1. For clarity, in the present section, variables are displayed in their original form.

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UAE, Turkey and Saudi Arabia are, again, the top host countries; in terms of average investment per project Libya, Djibouti and Qatar present the highest figures.

Map 1: Greenfield investment in volume, 2003-2012

Map 2: Average greenfield investment over GDP, 2003-2012

Institutional Environment

In order to account for the institutional environment from the host country, we first consider an index that represents the countries’ political system. Democracy combines both, the measures of the degree of democracy and autocracy of a given country. According to it, and to the measures of democracy and autocracy from Systemic Peace, a country can register non-zero values for both autocracy and democracy. This is due to the fact that both indexes include several independent measures6, being possible that a country have at the same time democratic and autocratic characteristics. This ordinal variable goes from -10 (no democracy) to +10 (full democracy). They consider different sets of political characteristics that define a democracy or autocracy (Marshall et al., 2015). We consider this measure as appropriate since

6 That is to say, democracy and autocracy scores do not have categories in common.

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the political system of a country is not a one-dimensional characteristic, but probably includes several dimensions (Adam & Filippaios, 2007).

Then, we consider four different indexes in order to disentangle the importance of specific aspects related with institutions. we use indexes of political stability, rule of law and lack of corruption from the World Bank’s Worldwide Governance Indicators. The three variables from the World Bank range approximately from -2.5 to +2.5 (Kaufmann et al., 2011), although estimates below -2.5 are possible. Higher values suggests respectively a more stable political environment, better rule of law and less corruption. For property rights we use the indicator provided by the Heritage Foundation which ranges from 0 to 100, where the highest value represent complete guarantee of property rights in the country.

Table 1: Institutional quality, 2003-2012

Variable Obs Mean

Std. Dev. Min Ma

x

World (without MENA) Democracy 1,402 4.81 5.78 -10 10

Political stability 1,656

-0.06 0.97 -

3.32 1.94

Compliance with rule of law

1,653

-0.06 1.03 -

2.67 2.00

Lack of corruption 1,643

-0.01 1.04 -

1.92 2.55

Protection of property rights

1,440

46.51 24.72 0 95

MENA Democracy 181 -3.58 5.49 -10 10

Political stability 190 -0.51 1.00 -

3.18 1.21

Compliance with rule of law 190 -

0.17 0.73 -1.92

1.03

Lack of corruption 190 -0.19 0.74 -

1.58 1.72

Protection of property rights 180 40.9

2 16.74 10 70

Rest of Developing countries Democracy 1,06

2 3.23 5.81 -10 10

Political stability 1,262

-0.34 0.92 -

3.32 1.42

Compliance with rule of law

1,259

-0.47 0.78 -

2.67 1.77

Lack of corruption 1,259

-0.39 0.79 -

1.92 2.42

Protection of property rights

1,080

37.31 18.77 0 90

Developed countries Democracy 340 9.72 0.56 8 10

Political stability 394 0.84 0.41 -0.47

1.94

Compliance with rule of law 394 1.22 0.59 -

0.23 2.00

Lack of corruption 384 1.22 0.81 -0.30

2.55

Protection of property rights 360 74.1

1 19.29 30 95

Sources: Systemic Peace (DEMOCRACY), World Bank (Political stability, Compliance with rule of law and lack of corruption) and Heritage Foundation (Protection of property rights). Authors’ own calculations.

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Violence

We measure violence impact by using an indicator of total civil violence (Total civil violence), total violence (Total violence), number of terrorist attacks (Terrorist attacks) and number of deaths due to terrorists’ attacks (Deaths due to terrorism). For controlling the impact from neighbour countries violence, we include in the regression a measure of total violence in neighbour countries (Total violence from neighbour countries)7. These measures are retrieved from the dataset of Major Episodes of Political Violence from Systemic Peace (Marshall, 2016).

Table 2: Violence, 2003-2012

Variable Obs Mean Std. Dev. Min Max

World (without MENA) Total civil violence 1,415 0.42 1.28 0 7

Total violence 1,415 0.46 1.31 0 7

Terrorist attacks 1,430 0.32 2.54 0 52

Deaths due to terrorism 1,430 7.79 59.24 0 112

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Total violence from neighbour countries 1,415 2.02 3.47 0 26

MENA Total civil violence 190 0.35 0.91 0 5

Total violence 190 0.63 1.47 0 6

Terrorist attacks 190 5.38 23.23 0 148

Deaths due to terrorism 190 91.32 422.31 0 403

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Total violence from neighbour countries 190 4.05 4.17 0 16

Rest of Developing countries

Total civil violence 1,075 0.55 1.44 0 7

Total violence 1,075 0.58 1.46 0 7

Terrorist attacks 1,090 0.41 2.90 0 52

Deaths due to terrorism 1,090 9.92 67.41 0 112

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Total violence from neighbour countries 1,075 2.47 3.82 0 26

Developed countries Total civil violence 340 0 0 0 0

Total violence 340 0.07 0.43 0 3

Terrorist attacks 340 0.02 0.25 0 4

Deaths due to terrorism 340 0.95 11.55 0 191

Total violence from neighbour countries 340 0.60 1.17 0 4

Source: Systemic Peace. Authors’ own calculations. Ease of doing business

For measuring the ease of doing business, as we are dealing with greenfield investments, we focus our attention on the ease of starting a business. We consider the number of procedures and the number of days required to open a new business (Days for starting a business and Procedures for starting a business). When it comes to FDI, these two variables are directly related with greenfield investments.

These indicators are from the World Bank Doing Business database, which is to the best of our knowledge a reliable source for accessing the business environment of a country (Pinheiro-Alves & Zambujal-Oliveira, 2012). We avoid using the index provided by the World Bank as there is evidence that it is not completely reliable (Pinheiro-Alves & Zambujal-Oliveira, 2012). Plus, taking these variables separately will allow us to provide a more precise analysis. In

7 CIVTOT refers to only domestic violence, while Total violence refers to episodes of domestic and international violence a country suffers. Total violence from neighbor countries is the measure of Total violence but for neighbor countries.

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contrast with the reviewed literature, we focus and greenfield investments and consider both the volume and number of projects (Carcoran & Gillanders, 2015; Jayasusiya, 2011; )

We also consider two general indexes related to the ease of doing business: Business freedom and Investment freedom. These variables are retrieved from the Heritage Foundation, they range from 0 to 100, the larger the number the more business and investment freedom a country enjoys. We consider them as robustness check, as shown in the correlation matrix they are highly correlated with the ease of doing variables.

Table 3: Ease of doing business, 2003-2012

Variable Obs Mean Std. Dev. Min Max

World (without MENA) Days for starting a business 1,217 43.87 62.80 0.5 697

Procedures for starting a business 1,217 8.87 3.53 1 21

Business freedom 1,440 64.06 17.04 10 100

Investment freedom 1,440 51.86 20.83 0 95 MENA Days for starting a business 151 25.60 16.44 7 79

Procedures for starting a business 151 9.42 2.87 5 17

Business freedom 180 62.27 14.43 20 87.50

Investment freedom 180 45.14 17.88 0 85 Rest of Developing countries Days for starting a business 928 51.18 69.52 2 697


Business freedom 1,080 58.74 15.26 10 100

Investment freedom 1,080 45.35 18.68 0 90 Developed countries Days for starting a business 289 20.40 19.24 0.50 138


Business freedom 360 79.99 11.15 53.70 100

Investment freedom 360 71.40 13.42 30 95 Sources: World Bank (Days for starting a business and Procedures for starting a business, 2004-2012) and Heritage Foundation (Business freedom and Investment freedom, 2003-2012). Authors’ own calculations.

Natural resources

We explore how holding natural resources influences the impact of institutions on FDI. In particular, we distinguish among MENA countries producing oil considering in these groups, MENA countries which belong to the OPEC or whose oil rents are higher than 9% of the GDP. This group includes the following countries: Algeria, Bahrain, Egypt, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Syria, United Arab Emirates and Yemen.

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Table 4: expected impact Variable Definition Source Expected sign Democracy Autocracy and

Democracy scale Systemic Peace +

Political stability Political stability index

World Bank +

Rule of law guarantee

Rule of law Index World Bank +

Lack of corruption Corruption index World Bank + Guarantee of property rights

Property rights Index Heritage Foundation +

Total civil violence

Civil violence Systemic Peace -

Total violence Total violence Systemic Peace - Terrorist attacks Number of terrorists

attacks Systemic Peace -

Deaths due to terrorism

Number of deaths by terrorism

Systemic Peace -

Total violence from neighbour countries

Total violence in neighbour countries

Systemic Peace -/+

Days for starting a business

Number of days for starting a busines

World Bank -

Procedures for starting a business

Number of procedures for starting a busines

World Bank -

Business freedom Business freedom index

Heritage Foundation +

Investment freedom

Investment freedom index

Heritage Foundation +

Results When it comes to FDI determinants, several works have followed the argument positioned by

Blonigen & Wang (2005) of considering separately developing and developed countries. For instance, Corcona & Gillanders (2015) find that the ease of doing business have different impact on FDI hosted in OECD countries than on FDI hosted in middle and low income countries. Asiedu (2002), focusing on FDI in developing countries, shows that infrastructure and return on investment attract FDI in non-Sub-Saharan Africa, while for Sub-Saharan Africa, no significant effect is reached. We believe this differentiation is particularly relevant when the nexus between FDI and institutions is considered, as the role played by institutions in attracting FDI is likely to not be homogenous. In consequence, we interact our independent variables that measure different aspects from institutions with two dummies, one representing MENA countries and the other the rest of developing countries8.

Our analysis in this section is threefold. First, we consider whether there is any difference between MENA countries and the rest of the world regarding how these different aspects of stability affect FDI inflows. Secondly, we compare the sensibility of FDI to these variables of MENA with the one of the rest of developing countries. Finally, we investigate in which manner owning natural resources, namely oil, affects the role played by institutions. Results are available between tables X-XY, referring always the three first columns to the intensive margin and columns 4-6 to the extensive margin.

Overall, the quality of institutions, mode of governance, violence and ease of doing business do appear to have a significant impact on greenfield investments. However, differences are found when we consider the intensive or the extensive margin. Moreover, we do find several particularities on these aspects when it comes to MENA and the rest of developing countries. In this way, our results confirm that the sensibility of FDI to institutions variables may differ not

8 It has to be taken into account that when both interactions are included, the base group is composed by developed countries. Though, the coefficient for MANA is obtained by summing the coefficients of the variable studied and this variable interacted with the MENA dummy.

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only depending on the level of development of the host country but also among different regions with the same level of development.

Democracy

Results obtained concerning the impact of democracy are reported in Table 8. Five from the six regressions report a positive and significant coefficient for Democracy. In line with previous work (Asiedu & Lien 2011; Busse & Hefeker, 2007; Farazmand & Moradi, 2014), our results support the hypothesis that democracy has an overall positive impact on both the volume, and the number of greenfield investments. On average, an improvement in one percent in the Democracy scale, is likely to increase investment flows in 0.66%. Likewise, improving one point in the Democracy scale, for instance by increasing in one point the political competition, GI may increase by 3.30%. When it comes to the number of projects these improvements could reach 0.29% and 1.45% respectively.

The way democracy or no democracy affects the volume of GI in MENA countries do not differ significantly from the rest of the world. Nevertheless, in the extensive margin when we include the rest of developing countries interaction some differences arise. According to our results, the positive impact of democracy on the number of investments projects received MENA and developing countries is quite lower than for the rest of the world. By improving in one percent democracy, developed countries would reach 2.24% more GI projects, while MENA countries would attract only 0.21% more projects and developing countries 0.28%. Likewise, one-point increase in Democracy scale will lead to an increase of 11.2%, 1.05% and 1.38% respectively in GI projects in developed, MENA and developing countries. Alternatively, if Bahrain reduces its level of autocracy to the one it had in 2010 it would attract a 5.25% more greenfield investment projects9. Though, developed countries, as reported in table XT, have little room for improvement, since most are complete democracies. Finding a coherent explanation for these results requires a more detailed insight into other facets of institutional framework.

Regarding the nexus between democracy, natural resources and FDI, we do find that the lack of significant oil production does alter the relationship between GI and democracy. The interaction Democracy*non-oil-MENA reported in columns 2 and 5 indicates that an increase of the degree of democracy may deter GIs, while we do not find any significant difference for oil producers MENA. This result is not in line with Asiedu & Lien (2011), according to their results we should expect a positive effect for non-oil producers and oil production should undermine the benefits from democracy. In fact, democracy, or lower degree of autocracy, in oil MENA producing countries attracts GI in the same way that at least the rest of developing countries or as much as the rest of the world. The negative effect found for non-oil-MENA is however surprising, at first sight, These countries present on average higher Democracy scores than oil-MENA, and among them Israel is present. Israel is an abnormality, it is the most democratic country in the region, and presents also the best values in rule of law, lack of corruption and property rights. Moreover, it is the sole country in the region in which M&As represent a larger share from total FDI. We believe that Israel is probably driving our results. Probably its attracts other type of FDI and with different entry mode than its counterparts, greenfield investments might be less relevant in this country than in the others.

Political stability and violence

The impact of political stability on FDI flows have a different impact from democracy (see Table 9). While political stability index does not have a significant impact on the intensive margin, it clearly has a positive and significant impact on the extensive margin. This would mean that instability in the host country may disincentive the investors to realise the projects but once they decide to do it, it doesn’t have influence on the volume of this project. Overall, one percent improvement on political stability index may lead to an increase of 1.02% projects in a given country. For instance, in the case of Algeria, increasing its political

9 Bahrain’s level of autocracy increased between 2010 and 2012, according to the polity2 indicator, it went from -5 to -10 (complete autocracy). It is interesting to highlight that this surge of autocracy coincides with the Arab Spring. Protestors were violently suppressed by the ruling Monarchy and the military support from Saudi Arabia. Interestingly, in 2012 the country received a 13% less greenfield projects and a 17.3% less in terms of volume.

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stability in 2012 to the rest of developing countries’ average of the period 2003-201210, would imply reducing political instability in approximately 74% and increasing the number of projects received by this country by 75.48%. This would imply receiving 17 greenfield projects instead of only 10.

In this way, results illustrate that political stability in the host country appears to be a relevant for foreign investors all over the world. This is also true for MENA and other developing countries. Additionally, no significant difference is reached for those MENA that produce oil those who do not. However, if we take a closer look to different violence indicators, a major cause of political instability, differences start to arise and a richer analysis is possible. Actually, the degree of violence is particularly high in MENA region which suffers 69% of the total number of terrorist attacks from our whole sample and 61% of the deaths caused by terrorism. The average total violence perceived by these countries is one third larger than the rest of the world, and the total violence from their neighbours is twice. Only 8 from the 19 considered economies are free from terrorism during the considered period.

Results concerning the impact of violence on FDI are displayed in Table 12, Table 13, Table 14. Overall, violence in the host country does not seem to influence FDI at the world level. The host country level of Total civil violence is not significant, while Total violence is only significant for the extensive margin in specification 6 of Table 14. For these variables, some particularities are found for MENA and developing countries. According to results displayed in Table 12 and Table 13, episodes of civil violence seem to have a negative impact on the number of GI projects in MENA, while in other countries it has none effect. When total civil and international violence is considered similar results are reached (specification 4, Table 14). However, in specification 6, when developing countries interaction is included, the negative effect appears to be relevant for the rest of the world and MENA, while for the rest of developing countries a small but positive effect is reached. Overall, results indicate that one percent increase in total violence reduces the number of projects by 0.47-0.57%. For instance, Iraq in 2012 had 417% more episodes of total violence than the rest of developing countries average during the considered period, this could imply to receive between 196% and 237.7% less projects

The impact of terrorism measured by the number of terrorist attacks, available in Table 12 is not clear: on one hand, it has, if any a negative impact on the volume of investment a country receives; on the other hand, two specifications (4 & 5) indicate that terrorist attacks have an unexpected small but positive impact on the number of projects. In the intensive margin, MENA countries appear to be affected in the same magnitude as the rest of the world, while the negative effect in the rest of developing countries is significantly lower. Then, in the extensive margin, MENA countries appear to be particularly negatively affected in comparison with the rest of the world while no effect is reached for the rest of developing countries. When the impact is measured by the number of deaths due to terrorism (table 7) similar reached regarding MENA and developing countries, but not positive effect is found for the rest of the world. It appears that terrorism has a larger negative impact on MENA, while for remaining developing countries the impact is still negative but smaller. Developed countries appear to be significantly negatively affected in terms of volume of investment but not of number of projects.

Regarding the influence of natural resources, civil violence seems to affect negatively only to the number of projects received by non-oil countries. In contrast, total violence particularly affects to oil producing countries. Total violence is composed of internal civil violence episodes and international ones. While the first is almost homogeneously distributed across both groups, it appears oil producing countries suffer from a larger rate of international violence episodes. Then, our results report that the negative impact brought by terrorism is concentrated in oil producing countries.

Overall, our results points towards a negative relationship between GIs and violence, which is in line with findings from previous literature (Abadie & Gardeazabal, 2008; Bandyopadhyay et al., 2013; Blomberg & Mody, 2005; Busse & Hefeker, 2007; Enders & Sandler, 1996). However, as in Asiedu & Lien, (2011) and Blomberg & Mody (2005), a positive relationship is also reached in some cases. Nevertheless, the relationship between violence and greenfield investment does not appear to be as straight forward as one would expect to be. On one hand, the lower negative impact that it appears to have on the rest of developing countries might be driven by those emerging economies that performed above average on attracting greenfield investments 10 Algeria had in 2012 a -1.32 value and the rest of developing countries had a -0.34 for the whole period.

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but also were considerably affected by civil violence and terrorism. For instance, India suffered from terrorist attacks in seven of the ten considered years and Russia in four. Episodes of civil violence appear to be quite relevant among these countries, they even present a larger average than MENA. While when it comes to total violence average are identical (see Table X2). In contrast, MENA appear to be particularly negatively affected by violence.

At the same time, the impact that violence has GI in MENA countries differs whether the country produces or not oil. We believe that international violence episodes, like wars, are more likely to alter regimes and governments’ policy when natural resources are at stake. Civil violence episodes are likely to have a negative effect on economic activity in general, but probably the natural resource sector is well secured from internal conflicts since they represent the main income for most of the considered countries. In a similar way, our results report that the negative impact brought by terrorism is concentrated in oil producing countries. Riots and protests appear to be more likely to be handled by oil producing national governments, while terrorism and wars not. The different impact between civil and total violence to certain extent goes in line with the argument presented by Adam & Filippaios (2007), slight civil repression might be preferred by MNEs which seek natural resources.

Outside MENA, sporadic global terrorism might be directed toward major economic and political centres that play a significant role against terrorism. Moreover, as suggested by Enders & Sandler (1996), larger countries are more capable to avoid the negative effects of terrorism by sustaining an environment of security. Our results are to certain extend in line with Blomberg & Moody (2005), whom find that the negative effect of violence on FDI is particularly strong for developing countries, while a small and weakly significant but positive effect is reached for developed countries. We find that the negative effect is drove by MENA, and is minor for the rest of them. Nevertheless, further research would be needed, as also shown by Blomberg & Moody (2005), the impact that violence might have on FDI can also depend on the type of investment, horizontal or vertical, and the sector which receives it. As suggested by Adam & Filippaios (2007), slight civil repression might be preferred by MNEs when low cost labour and natural resources are at stake.

Neighbours’ violence

A more robust result is found concerning the impact of violence in neighbour countries. Countries suffering violence in their neighbourhood appears to attract GIs, other thing being equals this finding is supported by 15 of the 18 specifications in the three tables. This finding supports the hypothesis that greenfield investments are displaced from countries suffering from violence towards neighbour countries with similar characteristics (Paniagua, 2011). One percent increase in the neighbours’ major episodes of violence, may imply an increase of 0.18% in the number of projects and volume a given country receives. As reported in regression 6 from tables 6, 7 and 8, this positive effect also applies to the number of projects developing countries receive. While in the intensive margin, specification 3, this variable loses significance for the rest of the world and developing countries.

In contrast, opposite results are reached for the MENA region. Our results show that that neighbour violence deters GI from MENA countries. This result is robust across all specifications from the intensive and extensive margin. On average one percent increase in the total violence from neighbour countries would deter GI from MENA countries by 0.30-0.40%. This impact is quite significant, if Tunisia had the same average value as Oman, 1.20 and 1.60 respectively, it would probably imply a decrease of GI in the country of almost 12%. Alternatively, if the total of violent episodes from neighbour countries of Lebanon increases by 1 in 2013 it would reduce its inward investment by 5% (it would imply increasing from 7 to 8 major violence episodes in neighbour countries, something quite likely considering its neighbours). This finding is not significantly affected when oil producing and non-producing countries are considered separately. Results reports that in the intensive margin the negative effect is concentrated in non-oil producing countries, while in the extensive both groups are negatively affected.

It appears that for MENA, each major violence episodes translate into a perception of regional instability for foreign investors. This might be because in fact violence spreads easily across frontiers or because investors perceive these countries as similar. Determining the exact cause of this phenomenon is out of the scope of the present work. While for most countries, violence in neighbourhood has good indirect consequences for MENA countries it has not.

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Institutions’ quality: Rule of law and corruption

On average, the rule of law does not seem to have a significant impact on GIs (see Table 3). Nevertheless, the sensibility of GI to the rule of law is especially high when they consider the possibility to invest in MENA, in comparison with rest of the world. This is also true but to a lesser extent for other developing countries. While a one percent improvement in this indicator in MENA would imply a 3.06% increase in the number of foreign projects in these countries, it would only lead to an increase in 0.82% in other developing. Meanwhile, surprisingly, specification six reports that improvements in the rule of law would actually deter GI projects from developed countries (base group). Regarding the role played by natural resources, our results report in the extensive margin that oil-MENA would benefit from improving this index, while non-oil do not present any significant relationship.

Lack of corruption, presented in Table 4, seems to have on average a weak positive impact on the number of projects a country receives. Though, at the world level, there is no clear connection between corruption and the volume of FDI inflows while corruption could slightly discourage investors to run their project in the host country. One percent improvement on this index may lead to an increase in 0.52% of the number of projects. In the intensive margin, when MENA and rest of developing countries interactions are included, our results report that lack of corruption would benefit the GIs’ volume of investment in the rest of developing countries. In contrast, for the rest of the world and MENA weak negative relationship is found. At the same time specification six reports that MENA and developing countries would actually receive more GI projects by reducing corruption. When MENA oil producers and non-producers are considered separately, we find that reducing corruption would negatively affect GIs into non producers, while it would increase the number of projects producers receive. As in the case of democracy, is likely that these results are being driven by Israel.

Improvement in the rule of law is prone to boost the number of GI projects which MENA countries receive, and also, in a lower extend, to developing countries. On the other hand, the opposite result is reached by developed countries. We believe that the different impact between MENA and the rest of developing countries can be due to two factors. The first is the inclusion of Israel among MENA, as previously pointed, when it comes to institutional quality, except for political stability, Israel is an outlier in the region. Secondly, the lower impact found for the rest of developing countries can be also explained by the presence of fast growing emerging countries that are successfully attracting FDI in spite of their lack of rule of law. Then, we believe that the following intuition can explain the negative impact reached for developed countries: Lower quality of rule of law among these countries is most of the times higher than the rest of the world’s and might be associated to poor among the rich countries. These countries may combine the advantages of developing and developed countries together when efficiency seeking and high qualified labour force is desired by MNEs.

Similarly, our results report that MENA and developing countries would benefit by reducing corruption. In contrast, when it comes to developed countries, this might actually deter the volume of greenfield investment received. First the following aspect has to be taken into account, the corruption indicator from developed countries is significantly better than the other two groups of countries. Their average is significantly larger, and the most corrupt developed country is less corrupt than the average developing country and not significantly different than the average MENA. It is likely that the real costs that corruption causes for FDI into developed countries to be significantly lower than in the rest of the world. Secondly, in a developed country the benefits from corruption might be larger than its costs. As suggested by Leff (1964), corruption might represent a mechanism through which MNEs may defend their interests, a way through which they can bend the law in their favour. This might be of certain relevance when a MNE considers investing a large sum of capital in a new project among similar countries. In addition, as in the case of rule of law, more corrupt developed countries are likely to be the poor among the rich. Evidence the positive impact from corruption have also been provided by Egger & Winner (2005) and Adam & Filipaios (2007), particularly the first defend the argument from Leff (1964).

Ease of doing business

The results related with the ease of doing business are reported in tables 9-11. Results report that the number of days and procedures necessary for starting a business as well as the business and investment freedom are mostly relevant in the extensive margin. Unexpectedly, on average the number of days and procedures appear to have a positive effect for the rest of

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the world. In contrast, investment and business freedom do seem to have a positive impact on the number of projects a country receives.

Specification six provides further insight on this unexpected finding. Our results report that the number of days and procedures have a similar negative impact for MENA and the rest of developing countries, while for the rest of the world (developed) the opposite result is reached. From specification 4, we gather that the negative impact suffered by MENA is driven by those that are oil producers, while for non-oil producing countries the coefficient is negative but insignificant. This difference between both is unexpected, probably a sectorial analysis would be needed as well as considering Israel separately.

When it comes to business freedom (table 11), results consistently report that MENA countries would deter GIs by improving this index. Natural resource specifications (2 & 4), show that this negative relationship is driven by oil producing MENA countries, while non-oil producer would benefit from more business freedom as the rest of the world. Then, in contrast to MENA countries, no significant relationship is reached for the rest of developing countries.

Regarding investment freedom (table 12), our results show that MENA and the rest of developing countries would benefit by improving in this index. It is however unexpected the results reported by specifications two and four. Our results indicate that improvements in this index would deter GI from non-oil producer MENA, while oil producers would attract more projects as the rest of the world.

The numbers of days and procedures necessary for starting a business clearly influence the number of GI project a country attracts but are not relevant for the volume. As for the stability of the political environment, these aspects influence more the decision of the investors on whether investing in this country or not rather than the magnitude of the projects. Similar conclusions concerning the influence of the easiness of doing business on FDI from US are reached by Corcoran & Gillanders (2015): it significantly influences the number of foreign subsidiaries but does not influence the amounts of sales and assets. In developing countries in general, these two indicators probably imply facing larger legal (and not legal) costs and dealing with inefficient institutions. Actually, is likely that these variables are representing how MNEs are deterred by corruption and lack of rule of law. In the particular case of MENA, although the number of days necessary for starting a business is almost half the rest of the world average and only five days larger than Europe’s, GIs are deterred similarly as in the rest of developing countries. Similar conclusion can be presented in the procedures case, in which actually the negative impact suffered by them is larger than for the rest of developing countries. The positive effect reached for developed countries is unexpected, it is likely that similar mechanisms are influencing MNEs’ decision to invest as in the case of rule of law and corruption. Overall, if a country like Kuwait in 2012 reduces the number of days necessary for starting a business to the regions period average, that is to say from 32 to 25 days, it would potentially receive 3.24% more projects. In the case of the number of procedures, from 12 to 9.71, the increase would be of 7.66%.

Then, larger business freedom deters GI from oil producing countries, while non-oil producing countries would benefit as the rest of the world. This result seems to contradict to certain extend to the ones of ease of starting a business. However, this index measures a wider range of aspects. Business freedom not only considers the number of days and procedures for starting a business, but also among other characteristics: the costs, the minimum required capital and the time needed for obtaining a licence. In addition, a closer look of the data reveals further insight on this matter. The correlation between the number of days, procedures and the index is lower for oil MENA producing countries than for the rest of the world. As presented in the following two correlation matrixes, the difference is particularly high in the case of the number of procedures. It is likely that our results are being driven by other characteristics considered in the index. Unfortunately, we cannot disentangle it in other to shed light on this matter, but indicate that these result shall be taken with caution and are probably not contradictive. To certain extend, this results may support the view that when natural resources are at stake, MNEs prefer lower freedom for new competitors that might diminish the benefits they may reap and their negotiation power with local governments.

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Table 5 Rest of the World Oil MENA producting countries Days for

starting a business


Business freedom



Business freedom


1 1


0.441*** 1 0.771*** 1

Business freedom

-0.394*** -0.629*** 1 -0.345*** -0.110 1

Non-oil MENA producing countries would actually receive less GIs if they have larger investment freedom. This would mean that those countries that have restrictions on several sectors, have laws and practices which are non-transparent, capital controls or put higher controls on FDI would attract more GIs. This finding is unexpected. On the other hand, oil producing countries would receive more projects by improving in this index. Thus, the investment freedom index does not confirm the hypothesis that MNEs would prefer lower competition, at least when competition is brought by FDI.

Concluding remarks

Main findings

It emerges from our results that the failures in host countries’ institutions are more willing to affect the extensive margin of GI inflows than the volume of these foreign investments. This is particularly true in the cases of political stability, rule of law and the ease of starting a business. Moreover, other facets of institutions are prone to make more attractive the host conutry for foreign investors; democracy, political stability, property rights, lower numbers of days and procedures necessary for starting a business, investment freedom. business freedom and to a lesser extent the lack of corruption positively influence the number of GI project. In contrast, violence has not a clear significant impact. In the following, further insight is reached when taking into account the heterogeneity of countries, providing evidence that the institution-FDI relationship differs depending on the development level and the natural resources they hold.

Some of the considered institutional characteristics appear to affect MENA countries differently or at a higher rate. First, violence seems to have a larger negative impact for MENA than for the rest of the world. While neighbours’ violence attracts GI into the rest of the world, in MENA countries the opposite result is reached. Similarly, our results report that major violence episodes (civil violence and total violence) have a negative effect for MENA while for the rest of the world it doesn’t. In the case of terrorism, the negative effect for MENA is considerably larger. Second, MENA countries would benefit much more from rule of law improvements than the rest of the world. In contrast, improvements in the business freedom would not clearly increase FDI in MENA.

At the same time, MENA and the rest of developing countries share some findings. When it comes to democracy, the benefits that MENA and the rest of developing countries would reap by becoming more democratic are lower than developed countries. On the other hand, both would benefit by reducing corruption, while developed countries would not. Similar conclusions are reached when the number of days and procedures necessary for starting a business, and investment freedom are considered.

As in previous works, our results support the importance of considering the role played by natural resources. Whether the MENA host country produces or not oil seems to significantly alter the FDI-institutions nexus. However, from previous works, one would expect that the presence of natural resources would be more likely to undermine the positive impact that better institutions would have on FDI. Our results do not confirm this assumption. When improvement in democracy and investment freedom would benefit to oil producing

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countries as much as the rest of the world or at least as the rest of developing countries. In addition, the positive impact to be obtained from improving the rule of law, reducing corruption, terrorism, total violence, and the number of days and procedures necessary for starting a business, seems to be concentrated in these countries. However, some opposite results are also reached; civil violence as well as lack of business freedom seems to favour investment in these countries. Altogether, it seems that GI in MENA oil-producing countries are sensible to institutional quality. Surprisingly, quality of institutions appears to deter GI from non-oil producing countries; more democracy and less corruption lead to less GIs, more days and procedures necessary for starting a business seem to have a positive effect in these countries as well as lack of investment freedom. Further research is needed tyo explain that findings, and particularly the presence of Israel among these countries makes us consider these results with caution.

Policy recommendations

Developing and MENA countries should improve their degree of democracy. Governments and society should move towards ensuring the existence of fully plural mechanisms through which citizens can influence policies and leader’s choice, restricting the executive power and guarantee civil liberties. Alternatively, autocratic components should be dismantled from these countries. The executive choice should be based on a competition between several alternatives, and participation should be permitted. The benefits from these reforms should also have a positive impact on oil producing countries, and will probably imply improvements in other institutional aspects that will also boost inward FDI.

Moreover, these countries should make efforts towards improving the rule of law and reducing corruption. Improving contract enforcement, property rights, safety of investments and transparency and independence from the judicial system are among the measures governments should focus. Governments should not only improve this aspects, but also the perception that economic agents have about their institutions. They should gain credibility in order to benefit as much as possible from these measures.

Our results highlight the need for fostering political stability in order to attract FDI. This should be reached by reducing internal and external conflicts, violence, terrorism, protests and riots11, or improving the government’s stability. For MENA, regional, internal and external peace is primordial. Lack of it deters greenfield investments as much as bilateral distance. Nations should, at the same time they reduce violence at home, put larger efforts in positioning their self as safe and stable despite neighbours’ instability. Additionally, without larger efforts from all countries from the region, and international organizations, towards peace in the region, economic prosperity will be hampered. Generalized perception and real violence across the region is likely to be negatively affecting not only inward FDI but also other aspects.

Improving the ease of doing business is a task that should be tackled by MENA and the rest of developing countries. As described by Dejankov (2009), during 2003-2008, the World Bank’s Doing business dataset shows 193 reforms in 116 countries. The main ones are: standardizing incorporation documents, reducing minimum capital requirement, taking out registration from courts and making use of notaries optional, and enabling online registration. These changes lead in several countries to drastic reduction in the time and costs that starting a business entails. The literature review from the author illustrates the positive effect that these reforms can have on entrepreneurship, growth, productivity and innovation. Furthermore, using the same database, Busse & Groizard (2008) present evidence that FDI does not foster growth under the presence of high regulation. In particular, authors highlight the relevance of market entry. However, as Jayasuriya (2011) contends not always legal improvements in the ease of doing business actually translates in real ones. If the number of days and procedures for starting a business are made in a real and transparent way, we believe MENA and developing countries are prone larger increase of GI than the one estimated in the present work. In line with the argument presented previously, lack of transparency and corruption is bound to undermine positive economic reforms.

How the presence of natural resources, in particular oil, affect the nexus institutions-FDI is not completely clear. Existing empirical evidence, as well as the one reported in the present work, is not robust enough to give any particular suggestion for these countries. However, even if there is an undesirable relationship between bad quality institutions and FDI, political system

11 Labour strikes are not included.

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and institutions should be improved. These improvements are prone to attract a more heterogeneous and value added FDI. Consequently, FDI is more likely to bring social welfare. Results support the view that these countries could particularly benefit from more democracy, better rule of law, less corruption and improving the ease of doing business. Is our belief that these improvements shall not be considered independently. In order to attract a significantly larger share of GIs, and benefit from it, MENA countries should tackle simultaneously all these aspects. Otherwise, it is likely that institutional deficiencies in some of them will undermine the potential benefits from improving others.

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Annex

Table 6: Institutions main statistics, 2003-2012

Country Democracy -

Autocracy Political stability

Rule of law

Lack of corruption

Total civil violene

Total violence

Number of terrorist attacks

Number of deaths from

terrorism

Total neighbours'

violence


Procedures for starting a

business

Business freedom

Investment freedom

UAE -8.0 0.9 0.5 1.0 0.0 0.0 0.0 0.0 0.5 17.2 9.0 61.7 37.5

Bahrain -7.2 -0.3 0.5 0.3 0.0 0.0 0.0 0.0 0.5 9.0 7.0 80.6 58.5

Djibouti 2.0 -0.1 -0.8 -0.5 0.0 0.0 0.0 0.0 5.6 40.0 11.0 41.7 53.5

Algeria 1.5 -1.3 -0.7 -0.5 0.8 0.8 0.7 17.5 0.5 24.1 13.1 71.2 46.5

Egypt -3.5 -0.9 -0.1 -0.6 0.1 0.1 1.0 17.0 6.6 17.7 9.1 56.4 53.0

Iran -5.5 -1.1 -0.8 -0.6 0.0 0.0 0.7 14.3 14.7 24.3 8.9 55.2 13.0

Iraq 3.0 -2.5 -1.7 -1.4 0.6 5.4 94.2 1588.0 2.4 31.9 11.0 . .

Israel 10.0 -1.3 0.9 0.8 2.0 2.2 0.7 12.8 1.5 19.0 5.0 68.3 75.5

Jordan -2.6 -0.4 0.4 0.2 0.0 0.0 0.3 6.3 9.1 22.1 8.9 64.7 61.5

Kuwait -7.0 0.3 0.6 0.5 0.0 0.0 0.0 0.0 5.9 34.7 12.9 68.0 45.5

Lebanon 6.0 -1.5 -0.6 -0.8 0.2 0.4 0.2 3.8 3.2 36.4 6.6 56.2 42.5

Libya -5.6 0.1 -0.9 -1.0 0.4 0.4 0.0 0.0 6.5 . . 26.0 18.0

Morocco -5.6 -0.5 -0.2 -0.3 0.0 0.0 1.3 6.0 0.8 14.6 6.7 73.4 66.0

Oman -8.0 0.8 0.6 0.3 0.0 0.0 0.0 0.0 1.6 25.3 8.0 64.7 53.5

Qatar -10.0 1.1 0.8 1.1 0.0 0.0 0.0 0.0 0.5 7.8 7.6 63.4 39.5 Saudi Arabia

-10.0 -0.4 0.2 -0.2 0.5 0.5 0.5 7.3 6.5 42.7 14.0 72.5 36.5

Syria -7.2 -0.8 -0.6 -1.0 1.0 1.0 2.0 37.4 8.9 30.2 10.0 57.3 28.0 Tunisia -2.3 0.0 0.1 0.0 0.0 0.0 0.0 0.0 1.2 11.0 10.0 77.4 35.5 Yemen -1.5 -1.9 -1.1 -0.9 1.1 1.1 0.7 24.7 0.5 41.4 9.4 62.3 48.5

Terrorist attacks, civil violence, total violence, neighbours’ violence and democracy indicators are retrieved from Systemic Peace, political stability, rule of law, days for starting a business and procedures for starting a business from World Bank and the lack of corruption, business freedom and investment freedom indexes from Heritage Foundation. See section on data for more invormation abour these indexes. Authors’ own calculations.

22

Table 7: Correlation matrix

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

1. Democracy 1 2. Political stability 0.286*** 1 3. Rule of law guarantee 0.460*** 0.785*** 1 4. Lack of corruption 0.431*** 0.757*** 0.953*** 1 5. Guarantee of property rights 0.504*** 0.657*** 0.923*** 0.903*** 1 6. Total civil violence -0.047* -

0.523*** -0.24*** -0.243***

-0.123*** 1

7. Total violence -0.033 -

0.573*** -0.264***

-0.258***

-0.095*** 0.918*** 1

8. Terrorist attacks -0.006 -

0.228*** -0.131***

-0.117*** -0.037 0.130*** 0.362*** 1

9. Deaths due to terrorism 0.001 -

0.247*** -0.134***

-0.120*** -0.046* 0.137*** 0.393*** 0.868*** 1

10. Total violence from neighbour countries

-0.377***

-0.360***

-0.270***

-0.291***

-0.278*** 0.276*** 0.265*** 0.060** 0.056** 1

11. Days for starting a business

-0.084***

-0.121***

-0.255***

-0.237***

-0.236*** 0.033 0.013 -0.02 -0.018 -0.029

12. Procedures for starting a business

-0.291** -0.361***

-0.499***

-0.488***

-0.510*** 0.160*** 0.128*** 0.033 0.029 0.186***

13. Business freedom 0.411*** 0.496*** 0.752*** 0.723*** 0.746*** -

0.111*** -0.086*** 0 0.011 -0.260***

14. Investment freedom 0.560*** 0.479*** 0.679*** 0.644*** 0.702*** -

0.150*** -0.132*** -0.057** -0.057** -0.306***

23

Table 8- Impact of Democracy on the intensive and extensive margin of GI Volume of GI

(intensive margin) Number of projects (extensive margin)

1 2 3 4 5 6 DEMOCRACY in host country

0.662** 0.660** 1.454 0.295*** 0.294*** 2.240** (0.28) -0.28 -1.81 (0.09) -0.09 -1.07

DEMOCRACY when host country is MENA

-0.187 -0.979 -0.081 -2.026* (0.49) -1.87 (0.16) -1.08

DEMOCRACY when host country is MENA (NON OIL PRODUCER)

-2.087** -0.455* -0.81 -0.26

DEMOCRACY when host country is MENA (OIL PRODUCER)

0.433 0.132 -0.48 -0.19

DEMOCRACY when host country is OTHER DEVELOPING COUNTRY

-0.797 -1.964* -1.84 -1.07

Constant 1.392 1.679 1.411 1.42 2.243 1.512 (3.70) -3.74 -3.71 (2.90) -3.04 -2.89 Observations 37153 37163 37153 37153 37163 37153 R2 0.432 0.432 0.432 0.845 0.845 0.845 Control variables from baseline model

X X X X X X

Estimation method PPML with fixed effect λi+λj+λt

24

Table 9- Impact of Political stability on the intensive and extensive margin of GI

Volume of GI (intensive margin)

Number of projects (extensive margin)

1 2 3 4 5 6 Political stability in host country

0.600 (0.39)

0.6 (-0.38)

0.495 (-0.8)

1.017*** (0.20)

1.017*** (-0.21)

0.941** (-0.45)

Political stability when host country is MENA

0.076 (1.17)

0.181 (-1.37)

0.139 (0.34)

0.217 (-0.54)

Political stability when host country is MENA (OIL PRODUCER)

0.075 (-1.25)

0.294 (-0.4)

Political stability when host country is MENA (NON OIL PRODUCER)

0.082 (-1.98)

-0.439 (-0.64)

Political stability when host country is OTHER DEVELOPING COUNTRY

0.124 (-0.91)

0.104 (-0.49)

Constant 0.046 (4.04)

0.046 (-3.75)

0.076 (-4.02)

-1.824 (3.05)

-1.831 (-1.97)

-1.81 (-3.05)

Observations 39118 39118 39118 39118 39118 39118 R2 0.431 0.431 0.431 0.846 0.846 0.847 Control variables from baseline model

X X X X X X


25

Table 10- Impact of Rule of law on the intensive and extensive margin of GI



1 2 3 4 5 6

Rule of law guarantee in host country

-0.013 (0.84)

-0.017 (-0.8)

1.534 (-1.78)

0.421 (0.48)

0.423 (-0.38)

-1.505* (-0.84)

Rule of law guarantee when host country is MENA

-2.412 (3.44)

-3.973 (-3.81)

2.608*** (0.82)

4.561*** (-1.07)

Rule of law guarantee when host country is MENA (OIL PRODUCER)

-2.77 (-3.73)

3.186*** (-0.83)

Rule of law guarantee when host country is MENA (NON OIL PRODUCER)

0.346 (-5.46)

0.259 (-1.66)

Rule of law guarantee when host country is OTHER DEVELOPING COUNTRY

-1.72 (-1.98)

2.324** (-1.08)

Constant

-0.152 (3.95)

-0.197 (-3.69)

-0.233 (-3.94)

-0.773 (3.34)

-0.743 (-2.08)

-0.809 (-3.42)

Observations 39151 39151 39151 39151 39151 39151 R2 0.431 0.431 0.431 0.845 0.845 0.844 Control variables from baseline model X X X X X X


26

Table 11- Impact of Corruption on the intensive and extensive margin of GI

Volume of GI (intensive margin) Number of projects (extensive margin)

1 2 3 4 5 6 Lack of corruption

0.593 (0.48)

0.577 (-0.51)

-1.782* (-0.96)

0.523** (0.25)

0.509* (-0.26)

-0.616 (-0.45)

Lack of corruption when host country is MENA

-0.885 (1.67)

1.418 (-1.84)

0.830 (0.51)

1.924*** (-0.63)

Lack of corruption when host country is MENA (OIL PRODUCER)

-0.434 (-1.8)

1.616*** (-0.59)

Lack of corruption when host country is MENA (NON OIL PRODUCER)

-5.723** (-2.4)

-3.284*** (-1.13)

Lack of corruption when host country is OTHER DEVELOPING COUNTRY

2.998*** (-1.07)

1.697*** (-0.54)

Constant

0.378 (3.95)

0.453 (-3.66)

-1.367 (-4.03)

-0.488 (3.27)

-0.404 (-2.05)

-1.702 (-3.3)


X X X X X X


27

Table 12- Impact of Civil violence and terrorist attacks on the intensive and extensive margin of GI Volume of GI (intensive margin) Number of projects (extensive

margin) 1 2 3 4 5 6

Total violence from neighbour countries

0.183** (0.08)

0.186** (-0.08)

0.138 (-0.1)

0.177*** (0.05)

0.176*** (-0.05)

0.177*** (-0.06)


0.038 (0.09)

0.04 (-0.09)

0.038 (-0.1)

0.045 (0.05)

0.045 (-0.05)

0.045 (-0.05)

Total terrorist attacks

-0.029 (0.04)

-0.029 (-0.04)

-0.343*** (-0.13)

0.032** (0.01)

0.031** (-0.01)

0.009 (-0.06)

Total violence from neighbour countries when host country is MENA

-0.555** (0.24)

-0.507** (-0.25)

-0.423*** (0.08)

-0.423*** (-0.09)

Total violence from neighbour countries when host country is MENA (NON OIL PRODUCER)

-0.928*** (-0.32)

-0.297*** (-0.1)

Total violence from neighbour countries when host country is MENA (OIL PRODUCER)

-0.376 (-0.31)

-0.525*** (-0.09)

Total violence from neighbour countries when host country is OTHER DEVELOPING COUNTRY

0.134 (-0.17)

0.001 (-0.08)

Total civil violence when host country is MENA

0.157 (0.40)

0.157 (-0.4)

-0.283* (0.15)

-0.282* (-0.15)

Total civil violence when host country is MENA (NON OIL PRODUCER)

-0.02 (-0.79)

-1.536*** (-0.56)

Total civil violence when host country is MENA (OIL PRODUCER)

0.139 (-0.39)

-0.218 (-0.15)

Total terrorist attacks when host country is MENA

-0.165 (0.15)

0.148 (-0.19)

-0.163** (0.06)

-0.14 (-0.09)

Total terrorist attacks when host country is MENA (NON OIL PRODUCER)

-0.25 (-0.17)

-0.061 (-0.1)

Total terrorist attacks when host country is MENA (OIL PRODUCER)

-0.155 (-0.17)

-0.216*** (-0.08)

Total terrorist attacks when host country is OTHER DEVELOPING COUNTRY

0.330** (-0.13)

0.025 (-0.06)

Constant

-0.010 (3.96)

-0.31 (-3.93)

-0.447 (-3.97)

-1.834 (3.17)

-1.764 (-3.16)

-1.88 (-3.14)


X X X X X X


28

Table 13- Impact of Civil violence and deaths due to terrorisms from terrorism on the intensive and extensive margin of GI Volume of GI (intensive

margin) Number of projects (extensive margin)

1 2 3 4 5 6 Total violence from neighbour countries

0.180** (-0.08)

0.182** (-0.08)

0.138 (-0.1)

0.176*** (-0.05)

0.175*** (-0.05)

0.176*** (-0.06)


0.045 (-0.09)

0.046 (-0.09)

0.042 (-0.1)

0.048 (-0.05)

0.047 (-0.05)

0.047 (-0.05)

Deaths due to terrorism terrorism -0.022 (-0.02)

-0.022 (-0.02)

-0.087** (-0.04)

0.006 (-0.01)

0.006 (-0.01)

-0.005 (-0.02)


-0.573** (-0.24)

-0.529** (-0.24)

-0.431*** (-0.08)

-0.431*** (-0.08)


-0.949*** (-0.32)

-0.299*** (-0.1)


-0.393 (-0.3)

-0.533*** (-0.09)


0.127 (-0.17)

0.001 (-0.08)

Total civil violence when host country is MENA

0.134 (-0.4)

0.137 (-0.4)

-0.276* (-0.15)

-0.275* (-0.15)

Total civil violence when host country is MENA (NON OIL PRODUCER)

0.028 (-0.78)

-1.547*** (-0.56)

Total civil violence when host country is MENA (OIL PRODUCER)

0.114 (-0.4)

-0.214 (-0.15)

Deaths due to terrorism when host country is MENA

-0.035 (-0.07)

0.03 (-0.08)

-0.068** (-0.03)

-0.057* (-0.03)

Deaths due to terrorism when host country is MENA (NON OIL PRODUCER)

-0.085 (-0.08)

-0.013 (-0.04)

Deaths due to terrorism when host country is MENA (OIL PRODUCER)

-0.027 (-0.08)

-0.087** (-0.04)

Deaths due to terrorism when host country is OTHER DEVELOPING COUNTRY

0.074* (-0.04)

0.012 (-0.02)

Constant

0.183 (-3.96)

-0.138 (-3.93)

-0.215 (-3.98)

-1.673 (-3.17)

-1.592 (-3.16)

-1.756 (-3.15)


X X X X X X


29

Table 14- Impact of Total Violence on the intensive and extensive margin of GI



1 2 3 4 5 6 Total violence from neighbour countries

0.185** (-0.08)

0.187** (-0.08)

0.144 (-0.1)

0.171*** (-0.05)

0.171*** (-0.05)

0.164*** (-0.06)

Total Violence

-0.028 (-0.1)

-0.026 (-0.1)

-0.438 (-0.47)

-0.081 (-0.05)

-0.082 (-0.05)

-0.565*** (-0.08)


-0.586** (-0.24)

-0.542** (-0.24)

-0.444*** (-0.08)

-0.437*** (-0.09)


-0.952*** (-0.31)

-0.283*** (-0.1)


-0.409 (-0.31)

-0.563*** (-0.08)


0.123 (-0.17)

-0.012 (-0.09)

Total violence when host country is MENA

-0.321 (-0.44)

0.093 (-0.63)

-0.473*** (-0.16)

0.01 (-0.17)

Total violence when host country is MENA (NON OIL PRODUCER)

-0.251 (-0.44)

0.17 (-0.21)

Total violence when host country is MENA (OIL PRODUCER)

-0.302 (-0.44)

-0.575*** (-0.17)

Total violence when host country is OTHER DEVELOPING COUNTRY

0.464 (-0.48)

0.620*** (-0.09)

Constant

0.179 (-3.96)

-0.129 (-3.93)

-0.397 (-3.97)

-1.29 (-3.09)

-1.232 (-3.08)

-2.157 (-3.09)



30

Table 15- Impact of Number of procedures on the intensive and extensive margin of GI



1 2 3 4 5 6 Number of procedures for starting a business

0.133 (-0.18)

0.123 (-0.17)

0.363 (-0.23)

0.144** (-0.07)

0.151** (-0.06)

0.489*** (-0.11)

Number of procedures for starting a business when host country is MENA

-0.427 (-0.6)

-0.675 (-0.62)

-0.436*** (-0.15)

-0.814*** (-0.17)

Number of procedures for starting a business when host country is MENA (NON OIL PRODUCER)

-0.927 (-0.57)

-0.341 (-0.34)

Number of procedures for starting a business when host country is MENA (OIL PRODUCER)

-0.392 (-0.62)

-0.494** (-0.19)

Number of procedures for starting a business when host country is OTHER DEVELOPING COUNTRY

-0.396* (-0.23)

-0.622*** (-0.12)

Constant

-8.598 (-6.58)

-15.006** (-6.43)

-6.744 (-6.81)

-15.896*** (-2.17)

-20.715*** (-2.22)

-11.998*** (-2.24)



Table 16- Impact of Number of days on the intensive and extensive margin of GI



1 2 3 4 5 6 Number of days for starting a business

-0.089 (-0.09)

-0.084 (-0.08)

0.045 (-0.09)

0.056* (-0.03)

0.063** (-0.03)

0.142*** (-0.04)

Number of days for starting a business when host country is MENA

0.064 (-0.27)

-0.101 (-0.29)

-0.136* (-0.08)

-0.259*** (-0.08)

Number of days for starting a business when host country is MENA (NON OIL PRODUCER)

-0.327 (-0.25)

-0.124 (-0.13)

Number of days for starting a business when host country is MENA (OIL PRODUCER)

0.075 (-0.28)

-0.176** (-0.09)

Number of days for starting a business when host country is OTHER DEVELOPING COUNTRY

-0.341*** (-0.12)

-0.269*** (-0.05)

Constant

-8.686 (-6.71)

-15.169** (-6.52)

-4.332 (-7.25)

-15.296*** (-2.16)

-20.022*** (-2.22)

-10.395*** (-2.4)



31

Table 17- Impact of Business freedom on the intensive and extensive margin of GI



1 2 3 4 5 6

Business freedom 0.247 (-0.15)

0.249* (-0.15)

0.169 (-0.42)

0.298*** (-0.08)

0.298*** (-0.08)

0.22 (-0.16)

Business freedom when host country is MENA

-1.019** (-0.43)

-0.938 (-0.58)

-0.465*** (-0.18)

-0.385* (-0.22)

Business freedom when host country is MENA (NON OIL PRODUCER)

1.846 (-1.43)

0.526 (-0.74)

Business freedom when host country is MENA (OIL PRODUCER)

-1.078** (-0.44)

-0.494** (-0.19)

Business freedom when host country is OTHER DEVELOPING COUNTRY

0.09 (-0.44)

0.095 (-0.16)

Constant

-0.683 (-3.92)

-2.903 (-3.94)

-0.612 (-3.94)

0.543 (-2.89)

-3.604* (-1.98)

0.603 (-2.9)



Table 18- Impact of Investment freedom on the intensive and extensive margin of GI



1 2 3 4 5 6

Investment freedom -0.099 (-0.14)

-0.099 (-0.13)

0.107 (-0.34)

0.130** (-0.06)

0.130** (-0.05)

-0.302** (-0.12)

Investment freedom when host country is MENA

0.306 (-0.27)

0.098 (-0.41)

-0.003 (-0.12)

0.439*** (-0.16)

Investment freedom when host country is MENA (NON OIL PRODUCER)

-2.115* (-1.18)

-0.498* (-0.3)

Investment freedom when host country is MENA (OIL PRODUCER)

0.385 (-0.27)

0.029 (-0.1)

Investment freedom when host country is OTHER DEVELOPING COUNTRY

-0.233 (-0.37)

0.547*** (-0.14)

Constant

2.28 (-4.03)

0.13 (-3.95)

2.141 (-3.97)

1.621 (-3.13)

-2.212 (-2.1)

1.355 (-3.17)



32

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