L'évaluation de l'attractivité des MENA (Middle East and North Africa) ((Moyen-Orient et Afrique du Nord)

Abstract

The objective of this paper is to evaluate the relative attractiveness of seven MENA countries (Algeria, Egypt, Iran, Saudi Arabia, Morocco, Tunisia and Turkey) as a location for foreign portfolio investment (FPI) from the G7 investors view points over the period 2001-2005. We suggest a methodology based on the combination of the gravity model, the analytic hierarchy process (AHP) and the goal programming model (GP). The gravity model is used to determine the attractiveness factors of a country with respect to FPI for 30 investing and 43 receiving countries. Results show the importance of information costs and bilateral trade in the determination of the bilateral asset holdings. The AHP method is applied to prioritize the set of FPI location alternatives according to variables’ significancy in the gravity model outcome; information costs, bilateral trade, GDP, investment freedom, institutional quality, and geographic distance. Results show that in general Saudi Arabia is the best destination for Japanese and US investors, Turkey is the favorite location for French, German, Italian and British investors and Algeria is the preferred country for Canadian investors. A combined AHP-GP model has been used to determine the degree of portfolio investment in each MENA country from the view point of G7 investors. The relative attractiveness of MENA countries varies over time and across investors. In general, over the period 2001-2005, the most attractive country is Iran for Canadian, French and Italian investors, Turkey for German and British investors and Saudi Arabia for Japanese and US investors. For a MENA country to attract more FPI it should especially improve bilateral trade and institutional quality and reduce foreign investment restrictions and information costs.

Keywords: Foreign portfolio investment, attractiveness, Middle East and North Africa, G7 investors, gravity model, analytic hierarchy process, goal programming.

JEL classification: F30: G11.

1. Introduction

The attractiveness assessment of MENA (Middle East and North Africa) countries as a location for foreign portfolio investment (FPI) from the G7 investors view points is an important feature that contributes to estimate the degree of economic and financial development of host countries. The MENA countries received comparatively a limited amount of foreign investments, they attracted only 2.8 percent of global funds because of institutional and regulatory barriers . However most of the MENA countries through stock market modernisation and liberalization, state owned firms’privatization, regulatory improvements and huge reform programs had reached an indeniably high level of financial development and stabilization and a significant success in the evolution of property rights and legal structures. The ratio market capitalization to GDP in the MENA region is 31% against 24% in Latin America and 26% in Eastern Europe . This development is accompanied by policies aimed at attracting foreign investors.

Zaher (2007) highlights the major developments and structural changes in MENA markets and remarks a noticeable growth during the last decade. He reaches this conclusion starting from the record growth rates in market capitalization, the number of listed companies, the value traded and the shares traded in most of the MENA capital markets. The same author concludes that to support the growth in capital market and attract more local and foreign investors, MENA markets need to continue to incorporate changes in the procedures, laws as well as the professional infrastructure in the financial market. He adds that MENA markets need to improve the procedures of information diffusion. Lagoarde-Segot and Lucey (2007) investigate the presence of portfolio diversification benefits in seven MENA markets. Their results underline the presence of outstanding potential diversification benefits in the MENA region, whether transactions are denominated in local currencies or in US dollar. These authors predict that MENA markets will be able to attract even more portfolio flows in the future.

Kamaly (2002) notes that, lagged real GDP growth and lagged value of FDI/GDP are the only significant determinants of FDI flows to the MENA region. Onyeiwu (2003) finds that corruption/bureaucratic radical beliefs and trade openness explain why MENA countries receive less FDI than other countries. According to Sekkat and Veganzones-Varoudakis (2004), the important factors in attracting FDI flows to MENA region are trade and foreign exchange liberalization. Méon and Sekkat (2004) study the impact of institutions on manufactured exports and FDI attractiveness in the MENA region and show that the deterioration of the institutions quality has in general a negative effect on manufactured exports and FDI attractiveness. Recently, Onyeiwu (2008) illustrates by using 61 MENA and non MENA countries that the key factors of attractiveness as to FDI flows are openness of the economy, GDP per capita and political risks.

In this paper we propose a methodology combining the gravity model, the analytic hierarchy process (AHP) and the goal programming model (GP). First the gravity model is used to identify the variables that best explain differences between countries as hosts to FPI. We consider both the basic gravity variables as well as several other barriers to international investment. These variables are; gross domestic product, geographic distance, investment freedom, information costs, bilateral trade, institutional quality, and the liability of self-dealing. Other factors like property rights, expropriation risk, market development and transaction cost have been excluded from the study because of their high correlation with the dependent variables. Data contain 30 investing and 43 receiving countries over the period 2001-2005. Second, the AHP is employed to prioritize the set of portfolio investment location alternatives from the different view points of G7 investors according to variables having statistically significant coefficient in the gravity model outcome. The AHP analysis is limited to seven MENA countries and six factors according to Saaty (1980) work recommends using a maximum of seven criteria or alternatives to allow for consistent pairwise comparisons. We use qualitative judgments and quantitative data over the period 2001- 2005 to determine respectively the relative importance of criteria and alternatives. Third, the GP approach takes into consideration both the AHP priority levels of MENA countries and the objective of return maximization measured by the relative GDP growth. It is used to determine the weights of portfolio investment in each MENA country from the view point of G7 investors for the period 2001-2005. We didn’t consider

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