Purpose The Arab region's instability in attracting foreign direct investment (FDI) can be partly attributed to observed challenges in corruption and macroeconomic instability. To this end, this study aims to investigate the impact of the macroeconomic environment, considering corruption, on FDI inflows into the Arab region. Design/methodology/approach This study utilizes panel data representing a sample of twelve Arab countries during the period 2003–2022, and applies the autoregressive distributed lag (ARDL) regression model and conducts a panel two-stage least squares with fixed effects (2SLS-FE) as a robustness check. Along with corruption, different dimensions, including market size, human development, energy efficiency, trade openness and property rights, measure the macroeconomic environment. Findings Even though a positive tendency is observed in the macroeconomic environment in the long run, corruption's impact on FDI inflows is negative and statistically significant for the countries under study, whereas it has a positive significant impact on FDI in the short run. In contrast to the negative role of corruption, FDI inflows may be significantly boosted by the macroeconomic environment measured by location indicators such as market size, human development, energy efficiency and internationalization indicators like trade openness and property rights. Originality/value The study's novelty inherent in establishing a clear divergence in the corruption and FDI inflows nexus. The positive tendency of corruption's impact on FDI inflows in the short run might speed up the FDI entry process and support the greasing the wheels hypothesis. Instead, in the long run, the impact of Corruption Index on FDI will transition to be negative as an outcome of institutional reforms and increased global scrutiny, which becomes viewed as a sign of political instability, which supports the grabbing hand hypothesis for modern foreign investors. However, the macroeconomic indicators emerged as the proper significant drivers of FDI. This study recommends applying sound legal procedures and policies that support the macroeconomic environment. It also suggests focusing on maintaining macroeconomic stability while aggressively simplifying institutional reforms and regulations as the most effective anti-corruption tools.
Mohammad W. Alomari (Fri,) studied this question.