The Nonlinear Effects of Macroeconomic Variables on the Flow of Foreign Direct Investment in Selected Middle Eastern Countries

This study aims to examine the nonlinear and asymmetric effects of macroeconomic variables on the flow of foreign direct investment (FDI) in selected Middle Eastern countries during the period 2007–2022. Using panel data from eight countries—Iran, Iraq, Saudi Arabia, the United Arab Emirates, Kuwait, Oman, Qatar, and Bahrain—the study applies the nonlinear autoregressive distributed lag model (Panel NARDL) to explore both long- and short-run relationships between key macroeconomic variables (exchange rate, inflation, economic growth, trade openness, and innovation) and FDI. Unit root tests, Kao cointegration test, and diagnostic tests were conducted to validate the model. The results indicate that trade openness, economic growth, and innovation exert a positive and statistically significant impact on FDI, whereas exchange rate and inflation have significant negative effects. Moreover, the effects of positive and negative shocks in these variables on FDI are asymmetric; that is, increases and decreases in the same variable lead to differing responses in FDI inflows. The model shows high explanatory power with an R-squared value of 0.91. The findings suggest that macroeconomic variables are not only critical determinants of foreign direct investment but also elicit asymmetric reactions depending on the direction of the shock. This underscores the importance of adopting flexible and differentiated economic policies to enhance FDI inflows in the Middle East region.