This study aims to investigate how fluctuations in global uncertainty affect foreign direct investment (FDI) inflows into 14 Middle East and North Africa (MENA) economies over the period 1997–2024. The objective is to quantify the sensitivity of FDI to global risk sentiment and to understand the mechanisms through which uncertainty shocks generate delayed investment responses.
The analysis combines dynamic panel estimation techniques (Pooled ordinary least squares (OLS), country fixed effects and Arellano–Bond Generalized Method of Moments [GMM]) with two widely used global risk indicators: the Global Economic Policy Uncertainty Index (GEPU) and the World Uncertainty Index (WUI). To probe the robustness of the baseline findings and to identify heterogeneity across MENA economies, the panel is additionally partitioned by income classification (high-income versus middle/low-income) and by oil–exporter status. To interpret the empirical elasticities, the study develops a jump-diffusion real-options framework in which uncertainty shocks raise the option value of waiting and elevate the optimal investment threshold.
Empirical results indicate that a one-standard-deviation increase in global uncertainty reduces FDI inflows by approximately 0.20, with the effect robust across Pooled OLS, fixed-effects and Arellano–Bond GMM specifications. Subsample analysis reveals systematic heterogeneity in both the magnitude and the transmission channel of uncertainty shocks. For global economic policy uncertainty (GEPU), the absolute coefficient is larger in high-income and oil-exporting economies (consistent with their higher base levels of inward FDI). The real-options framework rationalizes these dynamics by demonstrating analytically how uncertainty elevates the threshold for investment and delays capital inflows. Specifically, the model’s comparative-statics results show that the optimal investment threshold rises with continuous volatility, jump intensity and jump size and with sectoral profit sensitivity to uncertainty and entry costs, while it falls with faster mean reversion. These analytical predictions provide a coherent qualitative explanation for the observed empirical lag between uncertainty spikes and FDI contractions.
By integrating dynamic panel econometrics and a tractable jump-diffusion real-options model, this paper provides a unified framework linking global policy uncertainty to FDI behavior in the MENA region. The real-options model is presented as an illustrative analytical framework whose comparative statics rationalize the sign and timing of the empirical relationships rather than as a calibrated quantitative tool; it offers policymakers a transparent qualitative lens for understanding how changes in volatility, jump intensity, or entry costs may shape FDI sensitivity to future uncertainty shocks.
