Assessing the Determinants of FDI in Emerging Markets : Do Natural Resources and Institutions Matter?

The role of Foreign Direct Investment (FDI) in economic development is a well-researched phenomenon. However, extant research has failed to arrive at a consensus on the key drivers of FDI, and the literature is particularly eclectic on the role of natural resources and institutions and how they influence FDI. The present paper argues that this lack of consensus is due to model uncertainty. Drawing on more recent literature on model uncertainty and the determinants of FDI, the paper uses a Bayesian Model Averaging (BMA) approach to find that neither natural resources (oil and gas) nor institutional quality is a robust predictor of FDI flows into 16 countries in the Middle East North Africa (MENA) region. The analysis shows that FDI flows are determined by per capita GDP and oil prices. Given the complexity and volatility of the international business environment, it is more important than ever that economic policy decisions are based on robust models that take into account model uncertainty