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Advances in Social Sciences Research Journal – Vol. 12, No. 1
Publication Date: January 25, 2025
DOI:10.14738/assrj.121.18213.
Alotaibi, M. M., Theng, L. W., Muhammad, H., & Ni, S. W. (2025). Influence of FDI Inflows on Income Inequality Through the
Moderating Role of Governance in Arab Countries. Advances in Social Sciences Research Journal, 12(1). 205-219.
Services for Science and Education – United Kingdom
Influence of FDI Inflows on Income Inequality Through the
Moderating Role of Governance in Arab Countries
Mashael Mohammad Alotaibi
School of Business and Economics, Uinversiti Putra Malaysia
Lau Wei Theng
School of Business and Economics, Uinversiti Putra Malaysia
Haslinah Bt Muhammad
School of Business and Economics, Uinversiti Putra Malaysia
Soh Wei Ni
School of Business and Economics, Uinversiti Putra Malaysia
ABSTRACT
This study investigates the relationship between Foreign Direct Investment (FDI)
and income inequality in Arab countries, emphasizing the moderating role of
governance, specifically corruption control and political stability. Using panel data
analysis, the research assesses how variations in governance impact the effects of
FDI on income distribution across these nations. Theoretical frameworks such as
modernization theory, dependency theory, and world-systems theory guide the
examination of whether robust governance can mitigate the potential negative
impacts of FDI on economic disparities. The findings indicate that FDI tends to
exacerbate income inequality in settings with weak governance. However, in
environments where governance mechanisms are strong, the adverse effects of FDI
on income distribution are significantly reduced. These results highlight the dual
role of FDI in promoting economic growth and contributing to income disparity,
contingent on the quality of governance. This research provides empirical evidence
on the conditional impacts of FDI, underscoring the critical role of governance in
achieving equitable economic outcomes from foreign investments. The insights are
particularly relevant for policymakers aiming to leverage FDI effectively within
development strategies that prioritize social equity and economic inclusivity. The
study suggests that future research might explore the long-term impacts of FDI and
delve deeper into the nuanced interactions between governance quality and
economic development in the Arab world.
Keywords: Foreign Direct Investment, Income Inequality, Governance, Arab Countries,
Political Stability, and Control of Corruption.
INTRODUCTION
Foreign Direct Investment (FDI) plays a crucial role in the economic landscape of Arab
countries, acting not only as a key driver of economic growth but also as a mechanism for
technology transfer and integration into global markets. Research by Triki, Dimitrova, and
Valentino (2022) highlights the nuanced relationship between FDI inflows and state fragility in
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Advances in Social Sciences Research Journal (ASSRJ) Vol. 12, Issue 01, January-2025
Services for Science and Education – United Kingdom
the Middle East and North Africa (MENA) region, underscoring the moderating roles of natural
resources and democratic governance. These dynamics are critical as they contribute to
economic stability and growth in these regions, which are often characterized by their complex
political and economic environments (Al-Refaei et al., 2024a; Al-Zubaidi et al., 2024; Triki et al.,
2022).
Income inequality remains a significant problem in many Arab countries, where wealth
disparities can undermine social cohesion and economic sustainability. This issue is
compounded by varying levels of economic development, governance quality, and external
economic influences (Abdulhadi et al., 2023; A. M. Al-Sharif et al., 2023; Al-Zubaidi et al., 2023;
Huynh, 2021). The importance of studying income inequality within the context of FDI is
underscored by its potential impacts on social equity and inclusive growth. As Huynh (2021)
notes, the relationship between FDI and income inequality is significantly influenced by the
quality of institutional governance, suggesting that stronger institutions might help mitigate
the adverse effects of FDI on income disparity.
Governance, particularly in terms of corruption control and political stability, plays a
moderating role in how FDI affects economic outcomes. Seyoum and Ramirez (2019) discuss
how economic freedom and government stability can influence trade flows and FDI, indicating
that good governance can enhance the positive effects of FDI. Similarly, Dossou et al. (2023)
explore how governance quality, aided by modern technologies like ICT, can affect income
inequality in sub-Saharan Africa, a concept that is parallel and relevant to the Arab context.
These insights are pivotal in understanding that without robust governance mechanisms, the
benefits of FDI might not reach all segments of the population, thus exacerbating income
inequality (Abdulhadi et al., 2022; A. Al-Sharif et al., 2023; Al-Zubaidi et al., 2022; Dossou et al.,
2023).
The objectives of this research are to empirically examine the influence of FDI on income
inequality in Arab countries and to assess how this relationship is conditioned by the quality of
governance. By focusing on specific governance mechanisms like corruption control and
political stability, this study aims to provide deeper insights into how policy frameworks can
be designed to ensure that the benefits of FDI are more equitably distributed. This research is
significant as it contributes to a more nuanced understanding of the socio-economic impacts of
FDI under different governance conditions, with potential policy implications for enhancing
economic equity and stability in the region.
LITERATURE REVIEW
Foreign Direct Investment
Foreign direct investment (FDI) plays a critical role in the economic development of nations,
particularly in developing countries, by providing much-needed capital, technology transfer,
and enhanced job opportunities. Paul and Feliciano-Cestero (2021) provide an extensive
overview of research on FDI, noting that multinational enterprises (MNEs) significantly
contribute to the economies where they invest, not only by increasing capital but also by
integrating local firms into the global economy (Abdulsamad et al., 2021; Al-Ghamdi et al.,
2021a, 2021b; Paul & Feliciano-Cestero, 2021). FDI influences national economies in several
profound ways. For instance, Brada, Drabek, and Iwasaki (2021) highlight the importance of
investor protection in attracting FDI, indicating that robust legal frameworks that protect
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Alotaibi, M. M., Theng, L. W., Muhammad, H., & Ni, S. W. (2025). Influence of FDI Inflows on Income Inequality Through the Moderating Role of
Governance in Arab Countries. Advances in Social Sciences Research Journal, 12(1). 205-219.
URL: http://dx.doi.org/10.14738/assrj.121.18213
investments correlate strongly with higher FDI inflows (Brada et al., 2021). Additionally, the
environmental impacts of FDI have been extensively studied, with Opoku and Boachie (2020)
discussing how industrialization driven by FDI can exacerbate environmental degradation
unless properly managed (Opoku & Boachie, 2020).
The trends of FDI flows into Arab countries exhibit significant variances based on geopolitical
stability, economic openness, and sectoral attractiveness. For example, Alfalih and Bel Hadj
(2020) examine the determinants of FDI in Saudi Arabia, an oil-abundant country, showing that
both short-term and long-term factors, such as oil prices and political stability, significantly
influence FDI (Abdulsamad et al., 2020; Alfalih & Bel Hadj, 2020; Jandab et al., 2020; Jandab et
al., 2019). Similarly, Hamid et al. (2022) discuss how FDI in Oman contributes to economic
diversification and decarbonization efforts, suggesting a targeted approach to FDI can help
achieve specific economic goals (Al-Refaei et al., 2024b; Al-Zubaidi et al., 2024; Hamid et al.,
2022). Specific studies, such as the one by Noori (2019), demonstrate the impact of FDI on the
economic growth of countries like Jordan, highlighting how capital injections from foreign
sources are crucial for maintaining economic growth trajectories (Noori, 2019). Meanwhile,
Sarkodie and Strezov (2019) analyze how FDI, coupled with economic development and energy
consumption, affects greenhouse gas emissions in developing countries, illustrating the
complex interactions between economic development and environmental outcomes (Sarkodie
& Strezov, 2019).
In summary, while FDI is generally seen as a driver of economic growth and development, its
effects are moderated by factors like investor protection, governance quality, and the
environmental policies of the host country. As these factors vary greatly across the Arab world,
understanding their impact helps in tailoring policies that maximize the benefits of FDI while
mitigating potential adverse effects.
Income Inequality
Income inequality is a pervasive issue impacting developing economies across the globe,
presenting significant challenges to social stability and economic development. Kuznets (2019)
posits a well-recognized hypothesis that economic growth initially leads to increased inequality
before eventually reducing it as a country develops further (Kuznets, 2019). However, this
theoretical model doesn't always hold true in practice, especially in the context of developing
economies where institutional frameworks and redistributive policies may be weak (van der
Hoeven, 2019). In the context of Arab countries, income inequality is both a longstanding and
complex issue. The "Arab inequality puzzle," as Achcar (2020) describes, refers to the paradox
where measured income inequality is relatively low in statistical terms, yet the perception of
inequality and its societal discontent is notably high. This discrepancy suggests that standard
measures may not fully capture the disparities in wealth and opportunities (Achcar, 2020).
Moreover, Hlásny (2019) addresses this by analyzing expenditure distributions, suggesting
that actual income inequality might be understated due to the limitations of traditional data
collection methods in these regions (Hlásny, 2019).
Recent studies have explored various factors contributing to income inequality within Arab
countries. For example, Jha and Kırşanlı (2024) investigate the role of corruption
democratization post-Arab Spring, finding that while political shifts aimed to distribute power
more widely, they inadvertently allowed corruption to proliferate in new forms, thereby