U.S. foreign direct investment (FDI) in the Middle East and North Africa (MENA) region is largely concentrated in natural resource-intensive sectors such as mining, while investment in tradable manufacturing sectors is limited and has decreased over time. The decline in U.S. FDI in the MENA region may be attributed to increased macroeconomic and political instability including exchange rate fluctuations, volatility in crude oil prices, and other factors. The objective of this paper is to evaluate the effects of host-country natural resource abundance, financial development, and institutional settings in shaping activities of U.S. MNEs in the MENA region. In addition, it examines the extent to which firm-specific financial constraints and productivity influence activities of U.S. foreign affiliates in the region.
We use a panel econometric model that assumes activities of an affiliate are functions of a set of country and firm-level explanatory variables. The econometric estimation is based on Poisson Pseudo Maximum Likelihood (PPML) that controls for parent firm, affiliate industry and country-year fixed effects. The analysis is based on detailed firm-level data obtained from BEA mandatory benchmark surveys on U.S. Direct Investment Abroad, which cover U.S. parents and their foreign affiliates, for 14 MENA countries during 1999–2019.
Our results show that natural resource abundance crowds out FDI in non-resource producing industry sectors. Also, results show extensive and intensive margins of FDI are affected in opposite directions by improvement in host-country financial development in industry sectors in which competition from local firms is pervasive. With respect to firm-level financial frictions, both extensive and intensive margins of FDI increase with increase in affiliate liabilities. Our results also demonstrate that the composition of U.S. foreign affiliate manufacturing firms in the MENA region is less heterogeneous in average sales than in other industry sectors and that the entry of foreign affiliates in manufacturing is concentrated among affiliates that are owned by larger and more productive parent firms. Our study contributes to the literature in providing evidence that host-country resource endowment and financial development, and firm-level financial constraints affect the pattern and performance of foreign direct investment in the MENA region.