FDI inflows and economic growth in Arab region: The institutional quality channel

This study empirically investigates the possible role of institutional quality in absorbing foreign direct investment (FDI) flows' spillovers for growth in a group of Arab countries. The analysis is performed by employing system GMM estimation in panel data comprising 11 Arab countries over the period 1988–2012. It develops overall indexes of doing business and economic freedom indicators using the principal components analysis (PCA) as weights. The study finds that the quality of institutions plays an important role in enhancing economic growth via indirect impact by absorbing spillovers of FDI inflows. On the one hand, the study reveals that greater macroeconomic stability and financial development have a positive influence on growth. The results of this study have several implications for policy makers.