FDI response to political shocks: What can the Arab Spring tell us?

This paper examines the FDI response to political shocks. I first investigate whether political or institutional quality is an important determinant of FDI inflows using a panel VAR model in a dataset of 146 countries over 1989-2015. Then, I exploit the Arab Spring incidence to measure the short-run effects of political shocks on FDI flows using the differences-in-differences (DiD) estimator for a subsample of nineteen countries in the MENA region. I account for possible bias of the DiD estimator resulting from dealing with heterogeneous group of countries by using the propensity score matching based on countries' economic development and political settings. The findings show that a positive shock to political quality would increase FDI flows which lends evidence to the importance of political quality in determining FDI flows. In addition, I find that the Arab spring has led to a drop in FDI flows to the MENA region. (c) 2019 Elsevier B.V. All rights reserved.