2025-10-06
Inward FDI Shows Greater Growth Impact in GCC Than Domestic Investment, Says IMF Working Paper
The inward FDI (foreign direct investment) has about three times the growth impact of domestic investment in the Gulf Co-operation Council (GCC) economies, according to an International Monetary Fund (IMF) working paper.
In a working paper 'Gulf Cooperation Council Diversification: The Role of Foreign Investments and Sovereign Wealth Funds (SWF)', the authors Yevgeniya Korniyenko and Weining Xin said their empirical analysis reaffirms the positive contribution of both inward and domestic investments to the GCC non-hydrocarbon GDP (gross domestic product) growth and economic diversification.
"Notably, inward foreign investment demonstrates a three times larger impact on non-hydrocarbon GDP growth compared to domestic investment, while outward GCC investment does not significantly affect domestic GDP growth," it said, adding, as much as 1% of GDP increase in inward investment is associated with more than 1% increase in the sectoral GDP over four years.
On the other hand, the paper highlighted that domestic investment, led by SWFs, was found to have a statistically significant positive impact, with 1% of GDP increase in SWFs’ domestic investment associated with about 0.4% growth in non-hydrocarbon sectors’ GDP over four years.
These findings suggest that the GCC policymakers should continue pursuing policies that attract foreign investment, including by further improving their business environment and strengthening institutions, while also encouraging domestic investment in partnerships with international private investors to accelerate diversification and promote growth, it said.
The Gulf countries are actively diversifying their economies across output, export, and revenue dimensions, in line with their national development strategies and global decarbonisation objectives. Despite this momentum, challenges remain in achieving deeper diversification and in attracting FDI to non-hydrocarbon sectors with strong growth potential, according to the paper.
The working paper assessed the role of cross-border and SWFs’ investments in fostering economic growth and diversification in the GCC. It said although the GCC countries attracted a higher share of foreign investment (as percent of GDP) since the pandemic, which positions them more centrally within the global FDI network, the overall foreign investment to the GCC remains low.
Results show that the GCC countries continue to attract investments with the Western hemisphere and Europe accounting for about 60% of the total inward investment. At the same time, the share of intra-GCC investment as a proportion of total investment into the GCC region remains "stable" at above 25%, underscoring the region’s commitment to continued regional cooperation and integration.
Since the pandemic, investment activity has increasingly shifted toward services, especially in transportation, logistics, ICT (information, communication and technology), and business services. The share of inward investment in services (excluding financial services) rose from an average of 30% during 2000–19 to around 70% in 2020–23.
"This trend is mirrored in outward and SWF-led investment. Within the GCC, SWFs allocate a significant portion of their investments to manufacturing and marketable services. While this sectoral shift is positive for diversification, it also raises concerns about concentration risks," the paper said.
In a working paper 'Gulf Cooperation Council Diversification: The Role of Foreign Investments and Sovereign Wealth Funds (SWF)', the authors Yevgeniya Korniyenko and Weining Xin said their empirical analysis reaffirms the positive contribution of both inward and domestic investments to the GCC non-hydrocarbon GDP (gross domestic product) growth and economic diversification.
"Notably, inward foreign investment demonstrates a three times larger impact on non-hydrocarbon GDP growth compared to domestic investment, while outward GCC investment does not significantly affect domestic GDP growth," it said, adding, as much as 1% of GDP increase in inward investment is associated with more than 1% increase in the sectoral GDP over four years.
On the other hand, the paper highlighted that domestic investment, led by SWFs, was found to have a statistically significant positive impact, with 1% of GDP increase in SWFs’ domestic investment associated with about 0.4% growth in non-hydrocarbon sectors’ GDP over four years.
These findings suggest that the GCC policymakers should continue pursuing policies that attract foreign investment, including by further improving their business environment and strengthening institutions, while also encouraging domestic investment in partnerships with international private investors to accelerate diversification and promote growth, it said.
The Gulf countries are actively diversifying their economies across output, export, and revenue dimensions, in line with their national development strategies and global decarbonisation objectives. Despite this momentum, challenges remain in achieving deeper diversification and in attracting FDI to non-hydrocarbon sectors with strong growth potential, according to the paper.
The working paper assessed the role of cross-border and SWFs’ investments in fostering economic growth and diversification in the GCC. It said although the GCC countries attracted a higher share of foreign investment (as percent of GDP) since the pandemic, which positions them more centrally within the global FDI network, the overall foreign investment to the GCC remains low.
Results show that the GCC countries continue to attract investments with the Western hemisphere and Europe accounting for about 60% of the total inward investment. At the same time, the share of intra-GCC investment as a proportion of total investment into the GCC region remains "stable" at above 25%, underscoring the region’s commitment to continued regional cooperation and integration.
Since the pandemic, investment activity has increasingly shifted toward services, especially in transportation, logistics, ICT (information, communication and technology), and business services. The share of inward investment in services (excluding financial services) rose from an average of 30% during 2000–19 to around 70% in 2020–23.
"This trend is mirrored in outward and SWF-led investment. Within the GCC, SWFs allocate a significant portion of their investments to manufacturing and marketable services. While this sectoral shift is positive for diversification, it also raises concerns about concentration risks," the paper said.
Source: GULF TIMES