Despite the horror evoked by terrorist activities, US FDI does not appear to be abandoning the Middle East. To test this hypothesis, an examination has been conducted, utilising data provided by the primary data collector of US FDI, the US Department of Commerce’s Bureau of Economic Analysis. The countries under examination include Israel, Saudi Arabia, United Arab Emirates and 17 others countries that are considered Middle Eastern. The Middle East was chosen because it is recognised as a region where Islamic extremist terrorist organisations are active, notably Al Qaeda, Hizbollah, and Hamas.

Some sceptics claim that US FDI flows have shrunk since peaking in 2000, but the data shows overall US outflows have not decreased drastically in the wake of ongoing terrorist activities in the Middle East and the 9/11 terrorist attacks on the US. Regional adjustments in FDI (which began prior to 9/11) have occurred rather than overall declines.

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Not packing up

Tables 1 and 2 show the six regional recipients of US FDI for the years 1990 and 2005. In both years, Africa and the Middle East remain in last place. The low rankings come as no surprise given the levels of instability and uncertainty in these areas. Political upheavals, toppling of governments, corruption and weak infrastructures have all served as basic disincentives for US investors. Despite these low rankings, though, the data does not indicate a retrenchment of US FDI from either of these two regions.

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Table 3shows total US investments in the Middle East region for the most recent six-year period, 1999-2005. The largest US investments in the region have traditionally occurred in Israel and Saudi Arabia, with Israel in the lead for all years.

In reviewing the data, it is evident that, despite the ongoing violence in the Middle East, US investors are not packing up operations and fleeing the region. When it comes to sector-specific investment, US investors are attracted to the oil and manufacturing sectors in the region, as shown in table 4.

Manufacturing and mining are the top ranking sectors for US FDI in the region, but mining takes the lead in an absolute sense – manufacturing is comprised of nine forms of various manufacturing sub-sectors of activities, whereas mining primarily represents one sector: oil. Although the percentages of FDI are slightly lower for the mining sector relative to overall manufacturing, mining garners a significant share of US investments as a sole sector recipient.

Astable 5 shows, little US investment is occurring in Israel’s mining sector, given that the country is not endowed with oil; instead, most US investment is targeted at the manufacturing sector. In contrast, Saudi Arabia, the UAE and the other countries in the region tend to receive more US FDI interest in their mining sectors.

The mining sector not only attracts US oil companies with an interest in drilling and exploration, it also leads to an emergence of other associated suppliers of capital (particularly in the form of equipment and financing). For the top three recipients of US investments, the reasons for such investments are as follows:

  • Petroleum is a lucrative industry that is needed to meet not only US market demands, but also world demand.

 

  • Manufacturing firms supporting military activities and security firms are also needed to build and maintain the necessary infrastructure to support and safeguard the petroleum industry.

 

  • Israel, despite not being endowed with oil, represents the only democracy in the region for the US, which explains in part its pro-US investment climate.

 

Israel in front

Table 4 shows that, since 1999, Israel has garnered the bulk of US direct investments (mainly in the manufacturing sector), with Saudi Arabia and the United Arab Emirates (UAE) following behind. The “other” category reflects the combined total of the remaining 17 countries in the region. The data shows that this category, although garnering more US investments than the UAE as a group, in an absolute sense, the “other” category has garnered the least in terms of individual countries. Despite the existence of continued unrest, it is clear that investors target specific regions where a profit can be made. Instead of making investment decisions based on perceived terrorist threats, such decisions tend to be based on how lucrative is the host country’s market for the expansion of profits. Take Africa, for example. There was little interest in investing in Africa until it was discovered that the region has lucrative oil fields (mainly in Nigeria) in need of developing. However, US interest in Africa still is not as entrenched as it is in the Middle East because there are fewer factors of wealth in Africa. This is due to poor economic development factors, such as weak infrastructure (unreliable transportation systems, utility services and telecommunications, for example), low literacy rates and low levels of gross domestic product per capita.

On the other hand, although GDP per capita is higher among the Middle Eastern countries than in Africa, the Middle Eastern economies remain fragile, especially given that most of them are highly dependent on oil as their primary source of export earnings. The volatility of the oil sector puts these countries at just as much risk as non-oil exporting counties when it comes to supply and demand factors.

Investment priorities

In essence, analysis supports the initially stated hypothesis. Although terrorism does seem to have an impact on multinationals’ strategic investment decisions, it has not led to a panic departure from the Middle East, particularly from areas that are endowed with resources that can translate into profits.

Although tables 1 and 2 reflect the low priority of the Middle East and Africa for investors compared with Europe, Asia Pacific, Latin America, and Canada, the Middle East remains an area of interest for investors. This is due mainly to the region’s oil endowments and concomitant manufacturing sectors. Political, and therefore economic, instability is not new to the region. Instead of a decline in investments, the data in tables 3 and 4 highlights a growing increase in investments, rising from $3.65bn in 1990 to $21.59bn in 2005.

Even when world attention was drawn to the horrors of terrorism following the events of 9/11, US investments essentially doubled, increasing from $10.863bn in 2001 to $21,591bn by 2005. This trend reflected a much greater growth in US FDI to the region than that prior to 9/11, when growth was more moderate.

While there are relatively stable political and economic regions, such as Asia Pacific, the Middle East and Africa will have to compete even more for US FDI receipts in the future. In the meantime, the evidence highlights that terrorism may play a role in international investment decisions, but it is not a primary determinant for US FDI in the region. Profitability remains the determining factor.

Olivia A Jackson is an associate professor at Florida Memorial University.