Against the backdrop of the escalating Israel-Palestine conflict in a region characterised by unpredictability, making forecasts or outlining patterns regarding FDI in the Middle East is a demanding task. 

Although Unctad data shows a global 12% decline in FDI flows in 2022, following a sharp drop in 2020 and robust recovery in 2021, the region has witnessed rapid growth in FDI. These inflows have notably been into digital technologies and renewable energy, which are now at the forefront of investors’ priorities. The number of greenfield FDI projects in the Middle East in 2022 was nearly double that announced in 2019, according to investment monitor fDi Markets. 

Investor sentiment has been optimistic. But the question that looms is whether this upward trend will persist in the coming years, and if the Israel-Palestine conflict will redraw the region’s investment map.

History repeating

Traditionally reliant on oil as its economic lifeblood, the region is now versed in the language of aerospace, advanced technologies and green hydrogen. Embracing economic diversification and ambitious development plans, while fostering openness in societies, the Middle East has shifted its focus to prioritise FDI attraction and political stability. However, the wind does not always blow in the direction ships want.

Geopolitics and FDI are inextricably linked. From an investor’s perspective, macroeconomic instability is, after political risks, the factor that places the greatest constraint on investments in countries. Additionally, investors are increasingly making decisions based on their principles and values. This includes responding to events via corporate activism, which can lead to shifts in their investment behaviour. Recent events bear this out: consider the mass exodus of investors from Russia as a result of the Russia-Ukraine conflict. Similarly, Middle Eastern countries that experienced the turbulence of the Arab Spring also saw a decline in FDI flows in subsequent years. History suggests that the escalation of the Israel-Palestine conflict will yield a similar outcome.

A patchwork picture

Data tracked by Unctad shows that Israel and the UAE are foreign investors’ top destinations in the region. Taking into account greenfield FDI, mergers and acquisitions and project finance, the figures reveal that from 2021 to 2022 both countries witnessed remarkable growth in inbound investment, catapulting them into 15th and 16th spot, respectively in its list of the world’s top 20 FDI host destinations.  

Yet this year the situation in Israel has changed. Amid protests against controversial judicial reforms proposed by the government and escalating risks within its domestic political landscape, the ministry of finance recently stated that in the first quarter of 2023 the country witnessed a 77.6% decline in inbound investments. Multinationals and start-ups are currently pursuing measures to relocate investments, human resources, and headquarters away from Israel due to the ongoing unrest. 

By contrast, the UAE’s priority is economic development, steering clear of political entanglements to achieve its goal of becoming one of the world’s top three international financial centres. Over the past decade, the UAE has tailored attractive investment packages, attracting capital reallocation in the wake of the Russia-Ukraine conflict and Brexit uncertainties. As a result, the region’s latest conflict is expected to work in favour of the UAE, potentially allowing it to replace Israel as the region’s leader in FDI.

Other countries could also see inflows increase. In Unctad’s list of 2022’s FDI recipients, Egypt places third in the Middle East and is the biggest recipient in Africa. Despite its high debt-to-GDP ratio, the country is buoyed by ongoing FDI reforms, political stability, and its strategic location. It has directed considerable investments toward world-class infrastructure, initiated a series of reforms to streamline the bureaucratic land acquisition and licensing processes, and emerged as a regional hub for green energy. 

Despite a dip in Saudi Arabia’s FDI inflows last year, the country remains steadfast in its pursuit of modernisation and endeavours to serve as an economic bridge between Africa, Asia and Europe. The establishment of top-notch economic zones across the country aims to attract businesses looking to expand and diversify their regional presence.

While the ultimate aspiration is for diplomacy and multilateralism to play a decisive role in preventing violence against civilians and resolving conflict, the latest geopolitical escalation provides a window of opportunity for forward-thinking countries in the region. By welcoming investments seeking reallocation, these countries can capitalise on the momentum generated by the shifting tides of regional geopolitics.

Mohamed Ibrahim Hafez is a political economist, and also serves as a policy advisor at the General Authority for Investment and Free Zones in Egypt.