Microsoft Word Hoekman Sekkat Arab ri042010

3.4 Investment flows 
The Arab region has long been the world’s smallest recipient of foreign capital. During 
the early 2000s, the ratio of foreign capital inflows to GDP averaged around 1% for the 
Arab region during the 2000s, as compared to some 3% in Sub-Saharan Africa and 4% in 
Latin America – with most of the growth occurring in Asia (Figure 5). Private capital 
flows comprise three components: FDI, portfolio equity flows and debt flows. FDI 
constitutes the largest component (between 50% and 80% over the period 1998-2006) 
followed by debt flows. Portfolio equity flows are rather marginal. FDI is of particular 
importance not only because it is large but because it is a source of knowledge and 
positive spillovers and are usually seen as longer-term and hence result from long-term 
decisions about the productive capabilities of the country whereas other flows can be 
more speculative in nature (see Gibson et al. 2006 for a recent survey). Although the ratio 
of FDI to GDP increased to 3% in 2006, it is still below that of other regions (Figure 6). 
Figure 5 
B r e a k d o w n o f t o t a l c a p it a l in f lo w s b y r e c ip ie n t
0 %
2 0 %
4 0 %
6 0 %
8 0 %
1 0 0 %
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
Y e a r
S
h
ar
es
E a s t A s i a a n d P a c i fi c
L a ti n A m e r i c a a n d th e C a r i b b e a n
M i d d le E a s t a n d N o r th A fr i c a
S o u th A s i a
S u b - S a h a r a n A fr i c a
Unfortunately, data on bilateral FDI inflows are almost nonexistent for the region. 
Hence, instead of focusing on actual flows, what follows focuses on the potential for 
intra-Arab FDI flows using UNCTAD’s Outward and Inward FDI Performance Indices. 

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17 
The former is calculated as the ratio of the share of a country’s outward FDI in world FDI 
to its share in world GDP. Hence, a value greater than 1 indicates that the country sends 
more FDI than its relative economic size, a value below one means that it sends less. The 
Inward FDI Potential Index captures several factors expected to affect an economy’s 
attractiveness to foreign investors (e.g. GDP per capita, GDP growth, the share of exports 
in GDP, an indicator of infrastructure, the share of tertiary students in the population, and 
country risk). It is increasing in the degree of attractiveness.
PF
10
FP