GFICA Index 2024 Edition

Resilience Amidst Crisis, but Why Are Arab and African Countries Lagging Behind? 

Global economic integration led to a significant increase in foreign FDI toward developing countries in the early 2000s. This trend was interrupted by the 2008 financial crisis, marking a turning point in global FDI flows.

Nevertheless, developing and transitioning economies displayed remarkable resilience, continuing to attract a significant share of global FDI, in contrast to developed economies, which were more heavily impacted by the crisis. Since 2020, FDI inflows into developing countries have exceeded those into developed countries, reaching nearly $937 billion in 2022, compared to $378 billion for the latter (see Graph 1). This resilience is explained by various factors, such as stable macroeconomic conditions, institutional reforms, and improvements in the business climate. 

However, Arab and Sub-Saharan African countries have shown relatively weak performance in attracting FDI, despite substantial reforms aimed at modernizing their economies. According to UNCTAD data, from 2013 to 2022, the Arab and Sub-Saharan regions attracted an average of only 2.8% and 2.5% of global FDI inflows, respectively, and 5.5% and 5.1%of flows to developing countries, respectively (see Graph 2). This raises questions about the underlying factors influencing FDI attractiveness and what additional measures Arab countries could take to improve their position in the global investment landscape. 

Our FDI Attractiveness Index ranks a set of 106 countries, representing 92% and 96% of global inward FDI flows and stocks, respectively, according to their attractiveness for receiving FDI. This structure enables detailed analyses of the strengths and weaknesses of countries in general, and Arab countries in particular. Indeed, 37 Arab and Sub-Saharan countries are part of the sample, representing 94% of the total FDI flows and 89% of the total FDI stocks in these regions.

The selection process for data series is not based solely on their relevance and suitability for assessing FDI attractiveness. Data availability is also considered as a constraint in order to maximize our sample of countries. We identified 47 different indicators, considered adequate proxies for the main drivers of FDI, and categorized them into three main groups: prerequisites, determining factors, and differentiation and agglomeration economies.

Rising political risk in the Arab and Sub-Saharan Regions

Over the past decade, the political landscape in both the Arab region and Sub-Saharan Africa has shifted dramatically due to a wave of widespread and unexpected social and political unrest. In the Arab region, this evolving political environment, coupled with ongoing geopolitical tensions in the Middle East, has heightened uncertainty around the region's economic outlook and increased the exposure of foreign companies to political risk (PR) when doing business in Arab countries. In Sub-Saharan Africa, political instability and economic transitions in certain nations have also contributed to an increase in perceived political risk for foreign investors. As a result, demand for PR insurance has risen in both regions, particularly for insuring investments in post-conflict nations and those undergoing economic and political transitions. Market capacity for PR insurance has grown significantly, reaching over USD 3.5 billion in 2022, tripling the USD 1.2 billion available a decade earlier. 

Regional fragmentation and conflict have not only heightened political risk exposure but also diverted resources away from much-needed economic reforms and sustainable growth, with the region’s economic outlook still heavily tied to global oil and gas prices.

FDI flows into the Arab region have been particularly affected by political risk since 2010, with investor concerns remaining high, especially in Arab Spring countries. Key risks include civil unrest, political violence, breach of contract, and restrictions on currency transfer and convertibility. Political risk remains a significant challenge in the region, where FDI inflows have been declining since 2008, and informal barriers to investment are higher than in other regions. The relative attractiveness of the Arab region (measured by FDI per capita) also remains low.

In a recent study, Ben Jelili (2023) has shown  that the perceived political risk in the Arab host-country reduces significantly greenfield FDI inflow regardless of the estimation method used. As well, the paper establishes that there is significant heterogeneity in foreign firms’ investment responses to PR in Arab countries.  This heterogeneity reflects differences in the component of PR and sectoral characteristics.  In this respect, the considered three components expropriation/breach of contract, transfer/convertibility and war/political violence risks have a negative and statistically significant impact on the probability that bilateral investment takes place. However, only the transfer/convertibility risk negatively and significantly affects the size of foreign investments made.  In addition, the findings reveal striking differences from sector to sector as concerns the relevance of home country PR components.  While the FDI participation probability is strongly negatively correlated with at least two of the three PR components, irrespective of the investment sector, the size of the FDI projects in resources and energy sector has the particularity of being insensitive to any component of PR. 

The 2024 FDI Country Attractiveness Ranking & Regional Landscape

We collected the individual data series for all countries in our sample covering the period from 2000 to the most recent year. After calculating the 2024 index, we find, unsurprisingly, that the United States remains the most attractive destination for FDI allocations, maintaining its top ranking from previous editions of the index. The US is followed by Singapore, Switzerland, the United Kingdom, Sweden, the Netherlands, and Canada.

Switzerland, the Netherlands, Canada, Denmark, Germany, Finland, Japan, France, and China have improved their rankings, whereas Hong Kong and Russia have seen a decline in attractiveness. 

Our methodology enables the calculation of regional scores for 10 key drivers, which are computed as simple averages. We observe (see table below) that the higher-ranked core markets (North America, Europe & Central Asia, and East & Southeast Asia & Pacific) consistently exhibit stronger development across key drivers, with the exception of the agglomeration effect. The table also highlights specific weaknesses in frontier markets (Arab World, South Asia, and Sub-Saharan Africa), particularly in areas such as their ITC sectors, innovation and differentiation environment, market access and potential, and financial development.

To illustrate shifts in FDI country attractiveness, we recalculated our current index for the year 2020 and compared the rankings. The graph below displays the current country rankings (on the vertical axis) and the changes in rank over time (on the horizontal axis, with positive shifts to the right and negative shifts to the left). This comparison offers valuable insights, highlighting significant improvements in FDI attractiveness for some countries and downgrades for others. The graph's four quadrants provide a framework for analysis.

Countries on the left side of the graph, particularly those with lower current rankings, warrant close attention from foreign investors. It would be prudent to advise investors to avoid countries in the upper-left quadrant. On the other hand, countries on the right-hand side of the vertical axis show promising developments. Those in the lower-right quadrant can be regarded as highly attractive investment destinations, while the upper-right quadrant includes countries with improving, but still moderate, levels of attractiveness. As one moves higher on the graph, it indicates less maturity for hosting FDI; however, investors should remain vigilant to avoid missing the optimal entry point.

Only two Arab countries—Bahrain, and Oman—are positioned in the lower-right quadrant, indicating their status as highly attractive investment destinations. 

Riadh Ben Jelili - IAE Bretagne Sud - University of South Brittany