Determinants and Impact of FDI on Bahrains Economy

Nassima Debab Assistant Professor, Department of Banking and Finance College of Business and Finance, Ahlia University P.O. Box: 10878 Manama, Kingdom of Bahrain E-mail: ndebab@ahliauniversity.edu.bh or Dr.ndebab@gmail.com Ali Al Mansoor Student, College of Business and Finance Ahlia University, Manama, Bahrain Abstract The project aims to identify the determinants of Foreign Direct investment and its impact on GDP growth in Bahrain for the period 1990 to 2009. To examine the impact of FDI on GDP and determinants of DI, regression analyses were applied on the collected data. This study presents positive and significant impact of Foreign Direct investment on GDP of Bahrain. Furthermore, the results indicate that market size, growth prospects trade openness / access to international market and Quality of human capital are the major determinants that have significant affect on the FDI inflow. The study found negative impact of political and macroeconomic stability on the attraction of FDI inflow. The research presents twoway effects between FDI and GDP growth. The recommendations are that Bahrain should adapt more of the foreign investments policies to improve their economic efficiency especially that they have the key determinants to attract the FDI and economic growth. Keywords: FDI, GDP, Economic Growth

1. Introduction
As globalization move and crosses around the world; more modernized countries comes out through economic integration and more trade agreements has appeared to enhance investments and trades or to be more accurate. FDI is known to have a huge benefit to the host country and our case, which is Bahrain it is likely to be more beneficial as it is one of the developing countries and a central financial hub. FDI improved Bahrains GDP and supplemented domestic investment, job creation and decreased unemployment rate, increased technology, and enhance social welfare in Bahrain. Bahrain has offered very attractive investment opportunities for foreign direct investment and adopted policies, rules & regulation, and laws to influence FDI to set-up in Bahrain, but on the other Bahrain has to protect domestic investors from those FDIs and as a result in the research project I aim to explore the consequences of foreign investments in Bahrain in different and to determine whether it has a positive impact on Bahrains economy and what are the benefits and limitations of FDI and in case of benefits which will likely occur; I am going to highlight some policy adjustment or recommendations that will likely encourage investors to bring their capital and feed the economic engine of Bahrain.

2. Literature Review
Various studies have been made in this area, particularly were on GCC as a whole and targets only one topic, i.e. determinants of FDI or the impact of FDI. The first study done by (Muawya Hussein) shows
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that GCC countries were lagging behind other developing countries towards FDI policy and thus, they were significantly trying to attract FDI and they are no more rely on their domestic strength and has recommended that GCC countries should create an attractive investment environment and also have a clear FDI policy. He also stated the theres no strong relationship or clear trend between FDI and economic growth. Second, (Mahmoud Al-Iriani & Fatima Al shamsi) examined the bidirectional way between FDI and GDP in GCC countries by developing a complex heterogeneous-panel cointegration model using panel data analysis and they concluded that there is a strong causal relationship between FDI and GDP and vice versa, and stated that GCC would benefit more from adopting new policies that will attract FDI because it will strengthen the relationship between the two as they are complementary factors. (K.Mellahi, Guermat, Frynas, & Al Bortamani) examined the legal business framework and tracked reforms, regulations and commercial laws as motives for FDI in Oman, and found that FDI is not only depend on policies trying to liberalize the economy, but also the ability of creating favorable investment environment that will allow the country to promote FDI, finally, they perceived that economic and political stability are the main motives for FDI in Oman. Another study conducted in Pakistan aimed to identify determinants of FDI and their impact on GDP by observing several indicators and analyze their effects on FDI and therefore on GDP, they found that certain factors such as market size, and cheap labor have significant positive impact on FDI while trade openness has significant negative impact, market potential and communication facilities have no significant impact on FDI. Overall FDI found to have a positive impact on GDP growth (Abdul Rehman, Organgzab, & Ali)

1. FDI Environment & Policies

It is well-known fact that Bahrain possesses some clear advantages, which could make its investment environment look more favorable for attracting FDI as it has been strong and stable financial centre according to IMF reports, as its unique geographical location in the heart of the gulf make it as a linkage point among GCC region. Further, it has highly-educated labor force demonstrated by high literacy rate that is greater than 91% in 2009 according to UN report. Also Bahrain ranked the worlds 16th freest economy and its the first in MENA region and the first state in gulf to have an active free trade agreement with the US. This chapter will talk in three dimensions. First, it will introduce the determinants of FDI and discuss each one of them. Second, will be the investment climate in Bahrain and its relationship with foreign investment. Finally, it discusses governmental policies towards FDI. 1.1. Determinants of FDI The core principle of any investment in to maximize profit and theses criterion will not be changed in case of FDI. Foreign firms also try to maximize their profit by expanding internationally not only to benefit the host country. So, in the following discussion, we will see different determinants and how their expected effect will be in terms of motivating FDI. 1.1.1. Market Size & Prospects of Growth Market size represents the capacity of the market that the firm will be operating in and thus large markets will expected to be more beneficial because of the higher level of sales, profits, and diverse resources. (Lim: 2001) Also, it will help reduce costs and benefit from the economies of scale. And therefore it allows efficient utilization. Market size is measured by the growth of Real Gross Domestic product (RGDP) per capita, which represents the actual share of economic output. In parallel line with market size growth prospects represent the growth in economic output in real terms therefore itll be measured by RGDP growth. (Schneider & Frey: 1985) As its clearly known that countries with high and sustained growth levels will be more favorable to FDI. Bahrain is a small country if it compared by other neighbors or even in the global view but it had a promising growing economy add on that it is classified as high-income country based on GDP per capita, which reflects its ability on consumption.
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1.1.2. Infrastructure Infrastructure can take many forms, ranging from lands availability, ports, roads and highways, and supply of water and electricity to telecommunication services such as phone lines and Internet. (Morisset: 2000). The existence of high quality infrastructure will induce foreign investors for doing business because of reduced costs hence maximizing return. Bahrain has benefited and still from its natural resources such as gas and oil but with newly developed strategy of diversification; it has done lots in developing projects especially in manufacturing are and other projects that will be discussed later in the project, added to that de-monopolizing the telecommunication sector and privatizing transportation. 1.1.3. Openness Openness is an indicator of how well the country is integrated with the global system through its international trade position because investors likely want a more open economy with free capital flows within regional or global level. (Oneyiwu & Shrestha: 2004) indicate that less capital controls and liberal trade policy would encourage FDI while restrictive one would deter FDI. Therefore, openness is measured by the amount of trade i.e. exports and import to the GDP (Carlos Rodriguez: 2002). Bahrain a strong relationship with its GCC and therefore GCC countries have almost non-tariffs duties adding to that, Bahrain has more than 90 trade agreements with countries all over the world. 1.1.4. Economic Stability Economic stability is one of the greatest indicators of the strength of economy and regulatory authorities over it. Economic stability is important because it provides kind of certainty in business operation. One of the leading variables is the inflation level, so, stable inflation indicate strong regulation otherwise it might be not. According to (Oneyiwu & Shrestha: 2004), high inflation level will increase cost of capital and therefore reduce profit. On the other hand, high inflation may indicate economic boom and expansion, which is a strong motive for FDI. Bahrain has a conservative monetary policy and the level of inflation is quite low trending over the years but that is not deflationary indication, more likely that Bahrain is maintaining what economist called healthy level of inflation ranges from 2%-6% approximately. 1.1.5. Fiscal Position Fiscal actions taken by government can be viewed from the perspective of their budget; high deficits and debt could be an indicator of high taxes. Foreign investors considerably think of hosts country tax law and high level of taxes will discourage FDI and the other way around when taxes are low (Oneyiwu & Shrestha: 2004). Viewed differently high deficits could arise from high expenditures on infrastructure and national project that attempts to encourage FDI in the future. Bahrain has no income tax policy on individuals and firms except for companies operate in natural resources, which are taxed 46% of their profit. 1.1.6. Human Capital Human capital is another considerable determinant. Large, efficient, educated population is an important attractive feature for FDI (Lewis: 1999). Also the availability of skilled labor at low wages is more important for efficiency-seeking FDI (Wheeler & Mody: 1992). Bahrain has an excellent human development rate as shown in the Figure below, and also have the highest level of literacy in the Arab world of 92% approximately. <Figure 3> On the wages side, Bahrain has the lowest wages level among its neighbors in the GCC, which can be beneficial for MNCs looking for cheap labor. Therefore, the more skilled labor at cheaper costs will motivate more FDI. <Table1> 1.1.7. Policies Promoting FDI Friendly business climate will encourage foreign investors; labor regulations, lower juridical hurdles, and property right are all incentives to encourage FDI (Lim: 2001). Other incentives can take other for
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like the standard policy for attracting is tax exemption and fortunately in Bahrain we have zero-taxes on income, other criterion is to cut import duties or kind of government subsidies that attempt to reduce production costs further details will be discussed later in this chapter. 1.1.8. Political Stability Several studies indicate the political stability is one of the most important motives attracting FDI. (Aharoni: 1966) noted that political instability is the most important factor affecting FDI decisions because political instability combined with uncertainty and therefore turbulent profits that also restated by (Bollen: 1982) as political instability reduces FDI flows. However, research indicated that political stability is pre-requisite for FDI to occur but not a strong motive (UNCTAD). In case of Bahrain, reforms had taken place since year 2002 and things were just fine up until late events in 2011; there were lots of violations and torture against protesters calling for more rights, reforms, and nondiscrimination in employment; which led to the cancellation of worlds main event formula 1 and some capital outflows. 1.1.9. Liberalization and Economic Freedom Free capital movement from the country is one of the great motives for MNCs considering their home countries and thus affect FDI inflows to host country policy (Bende-Nabdene: 2002). Economic freedom index is developed by ((Heritage freedom)) which consists of 10 measures; business freedom, trade freedom, fiscal freedom, monetary freedom, government spending, investment freedom, property rights, freedom from corruption, labor freedom, and financial freedom. Bahrain got the highest ranking in the MENA region and therefore the freest economy in the region. Its worth noting that Bahrain ranked 28th in the easiness of doing business according to The International Bank for Reconstruction and Development which is the second best after Saudi in the GCC region. 1.2. Investmetn Environment In regard and to keep on track with global world Bahrain had adopted several agencies to promote the economic engine. Hence, boosting the countrys growth. Such as establishing Economic development Board (EDB) whos responsible for formulating and overseeing strategies for economic development and creating featured investment climate to attract direct investments to Bahrain and Tamkeen which was established to encourage Bahrainis employability, job creation and support that will enhance the quality of labor force especially in the private sector. Bahrain as newly growing country away from oil dependency has done a lot to create the right atmosphere for different kinds of industries and sectors, it has newly built port Khalifa bin Salman which is a major trans-shipments in the region, Bahrain International Investment park that provides a unique opportunity for business looking to locate manufacturing and international services operations in the Middle East, Bahrain logistics Zone which is the regions first boutique logistics area offering a high quality environment to companies that meet its tenancy requirements. And Bahrain Financial harbor that has been created to reinforce Bahrain's unsurpassed position as the leading international financial centre of the Middle East by evolving a highly focused, committed and advanced financial environment for its occupants to thrive and prosper. Not just that but Bahrain has a new upcoming project that is Science and Technology Park which is designed to encourage technology innovation and scientific research across the region. Lately Bahrain is highly considering attracting Information and communication technology (ICT) companies to showcase and capitalize on the existing & new technology growth centre in the region, in order to meet the rising demand for new products, services and applications. As mentioned earlier as Bahrains strategy is to diversify away from the oil dependency and to coupe with its economic vision 2030. It has created the first block for various investment opportunities in financial services, Manufacturing and industrial services, education and training, tourism, energy, and health care that will allow Bahrain to be in the first lines among developing countries demonstrated
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by getting the highest foreign investment in the gulf region according to world investment report. However FDI is a variable resulting from efficient combination between the companies competitive advantages and the characteristics of the country that is expressed in its legislations and polices. Although, the fact that the Bahraini government considering attracting inward FDI as key components of the overall development strategy as certain characteristics concretely expressed in Bahrain commercial law. 1.2.1. Rights of Ownership and FDI Establishment In the early stages of development FDI has been permitted to offshore banking and export-oriented industries mainly was food or sectors that the government seeks to develop. Bahraini government allow 100% foreign ownership of the company except for those listed in the stock change limited to 49% of ownership rights and also fully land ownership by foreigners, along with free movement of capital and foreign exchange. 1.2.2. Incentives for Investment Programs As s the use of investment restrictions has declined, incentives have become more prevalent across the world. Incentives include a range of policy instruments such as tax concessions, subsidized infrastructure or services, regulatory concessions and employment subsidies. These instruments aim to induce new investors to establish a presence, to expand an existing business or not to relocate elsewhere. They may also be provided to increase the benefit from FDI by stimulating foreign firms to do more to operate in a way that promotes the type of development that is desired. Yet incentives can be costly and there is a general agreement that governments should pay attention to building competitive capability by focusing on productivity improvements, skills development and technology upgrading to attract higher quality FDI. With regard to Bahrain, there are no special performance requirements imposed on foreign investors. Foreign and Bahraini-owned companies must meet the same requirements and comply with the same environment, safety, health, and other labor requirements. Bahrain has reconsidered and abandoned its incentive plan, which was introduced in 1996 in the same year because it was too costly. The government planned to offer financial incentives to foreign investors, including a subsidy of US $11,925 per year for the first three years for each Bahraini employee employed by companies setting up factories in pioneering industries, US $7,950 per year for downstream industries, and US $2,650 per year for companies setting up factories in existing industries. New investments were also entitled to a 50% rebate of electricity charges, a 100% rebate of rental in government industrial areas and a 100% rebate of customs duties for the first five years, for all industries. Furthermore, 10-20% tariff protection could be given to pioneering or downstream industries. Subsidies and advantages offered to foreign firms are equal to those available to Bahraini companies, and all firms in Bahrain benefit from subsidized utilities. Investors also benefit from a developed infrastructure with excellent transportation and communication facilities, and a duty free access to Gulf Cooperation Council member states for products manufactured in Bahrain. Bahrain has also phased out most industrial subsidies for export industries, which still benefit from subsidized utilities, and permits duty free importation of raw materials, equipment, and machinery. With regard to taxation, Bahrain is essentially tax-free. There is no individual income tax, nor does the country have any value-added tax, property tax, production tax, or withholding tax. The only exception would be for companies engaged in gas and petroleum extraction and refining. Corporate tax is levied at a rate of 46% for petroleum and gas companies. The government collects customs duties and a few indirect and excise taxes, which include a tax on gasoline, a 10% levy on rents paid by residential tenants, a 12.5% tax on office rents and a 15% tax on hotel rates. It also charges a fee for the issuance of expatriate work permits as an attempt to encourage employment of Bahraini citizens. Liberal taxation and import laws apply equally to Bahraini and foreign-owned companies, which are also eligible for partial financing from the state-owned Bahrain Development Bank, if they meet certain criteria such as providing employment to a significant number of Bahrainis.
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Foreign investors also benefit from a developed infrastructure with excellent transportation and communication facilities, and a duty free access to GCC states for products manufactured in Bahrain. Liberalization and privatization have become almost a universal policy prescription in the 1980s and 1990s and have been undertaken for multiple aims including: raising revenue to reduce debt level, enhancing efficiency, attracting foreign investment and redistributing wealth and economic power within the economy. Privatization has played a key role in the rapid growth of FDI, especially in Argentina, Chile and Mexico. In South East Asia, the importance of public enterprises, which have played a key role at the early stages of development as in many other countries, gradually declined with the development of the private sector and market liberalization has become effective. The issue of privatization has been raised by economic elites in the GCC states, particularly during the late 1980s with the conjunction of the downturn in the world oil market and the popularity of privatization measures in other parts of the world. However most of these plans were not carried out In the 1990s Bahraini progress in privatization of public enterprises has been slow. Recently, the government stepped up privatization and opened up a large number of sectors to private sector investment, both foreign and domestic but particularly in services, following the establishment of the Supreme Privatization Council in the spring of 2001. One year later, the King of Bahrain issued a decree laying out guidelines for privatizing tourism, telecommunications, transport, electricity and water, ports and airport services, oil and gas and postal service sectors. 1.2.3. International Agreements Bahrain concluded several agreements at the bilateral and multilateral levels that address investment issues, which complement its national and regional FDI policies. In 1987, Bahrain and the US government signed an agreement regarding the inauguration of activity in Bahrain by the Overseas Private Investment Corporation, which opened the way for the extension of its facilities such as investment insurance, reinsurance, and investment guarantees to US private investors interested in doing business in Bahrain. This is to mitigate risk by providing investment insurance against losses arising from political and other non-commercial risks that are not covered by the Bahraini insurance market. It is one of the measures often used by developed countries to influence the flow of FDI to developing countries with which developed countries have special relationships. Other measures include general aid-based development assistance to strengthen a host countrys business environment, improving access of goods and services produced by these countries to the markets of the developed countries, providing information related to investment opportunities through cooperation with local investment promotion agencies and encouraging technology transfer to the host countrys technological base and its capacity to act as a host to FDI in technology-intensive industries. However, early stages of the Bahrain-US free trade negotiation go back to the year 1999, with the signing of a Bilateral Investment Treaty between the two countries, which entered to force in May 2001. It was the first investment treaty signed between the US and a member of the GCC aiming at stimulating the flow of private investment between the two countries. One year later, the Trade and Investment Framework Agreement (TIFA) were signed, which was designed as a forum for an ongoing bilateral dialogue on economic reform and trade liberalization. The TIFA also established the United States-Bahrain Council on Trade and Investment, whose main objectives include identifying opportunities for expanding trade and investment opportunities, and working towards the removal of impediments to trade and investment flows. The Council met twice before the signing of the FTA and talks were focused on economic and financial cooperation as well as trade and investment opportunities particularly with regard to banking, insurance, healthcare, tourism and education and training. 1.3. FDI Policies Bahraini government officials view the FTA as the backbone of a growing economic relationship between the Kingdom and the US, just as the North America Free Trade Agreement (NAFTA) fostered links between the United States, Canada and Mexico he US-Bahrain FTA17 included, in addition to
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tariff elimination, commitments to increase access for US firms to Bahrains service sector, and it is expected to bring about the following effects according to a report published by the Ministry of Finance. First, it would serve in expanding the market for Bahraini goods and services and increasing exports opportunities. This is by increasing the comparative advantage of Bahraini exports to the markets of the US and its FTA partners relative to exports of other countries, due to the elimination of tariffs and attainment of national/most favored nation treatment. According to the US-Bahrain FTA, 100% of bilateral trade in consumer and industrial products will become duty-free immediately upon entry into force of the agreement. Both countries will also provide duty free access on virtually all products in their tariff schedules and will phase out tariffs on the remaining handful of products within ten years. In addition Bahrain will accord substantial market access across its entire service regime, providing what has been described as the highest degree of market access of any US FTA negotiated. Key services sectors covered by the agreement include audiovisual, express delivery, telecommunications, computer and related services, distribution, healthcare, services incidental to mining, construction, and engineering. Second, the FTA agreement is also expected to serve into the expansion of manufacturing sector since foreign investors are able to establish joint ventures in Bahrain and boost domestic welfare. Accordingly, this is likely to increase Bahrains competitiveness in terms of attracting FDI. Third, Bahrains service sector is likely also to expand as well, since the agreement provides substantial market access and benefits for Bahraini businesses wishing to supply cross-border services as well as those wishing to establish a commercial presence in the United States; it also accords them national or most favored nation treatment. This is expected to help the expansion of Bahrains financial sector, especially in emerging key service area such as insurance and Islamic banking. It also would stimulate IT and E-commerce activities in Bahrain, promoting Bahrain as an ECommerce leader in the Gulf region. Finally, the FTA complements the efforts of Bahrains officials in strengthening the Bahraini private sector, reinforcing Bahrains position as a gateway to the surrounding region, promoting economic growth, creating employment opportunities for locals and further diversification of the Kingdoms economy as a result of the expansion in trade and increased FDI in manufacturing and services sectors. The US has also committed itself to help them attaining these goals by providing technical assistance in various forms, including market studies, business development programs, training personnel, development of electronic systems, as well as assistance in the development of policies and procedures to facilitate the implementation and effective administration of its FTA commitments. While the government of Bahrain clearly intends to encourage FDI in governments projects mentioned earlier, its law and procedures are not always transparent, and bureaucratic procedures can create significant stumbling blocks, particularly affecting the establishment of manufacturing facilities. These appear to be due to the lack of coordination between government ministries, most of which must sign off on one stage or another of the licensing procedures. Interpretation and application of the law sometimes vary by ministry. Inconsistencies also can arise with issues such as visa application and customs valuations. Corruption, which is a global problem, is sometimes a part of doing business in Bahrain. Some officials have been dismissed for blatant corruption, but it is never so stated officially. Bahrain is not a signatory of the OECD Convention on Combating Bribery. Consequently, foreign firms have found it useful to have some sort of facilitating relationship with a local company or individual, particularly to deal with local bureaucracy. However, Bahrain government has had an attention to this problem including conducting several shops that has been organized by EDB to remove bureaucratic stumbles.

3. Research Methodology
This study uses regression analysis along side with Ordinary Least Square (OLS) method. Two models were formulated. First, is to indentify determinants and relationship between variables and the FDI. Second, to identify the relationship and the effect of FDI on economic growth that is measured by change in GDP.
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The form of the 1st part of research will be as follows FDI = f (RGDP, RGDPGpc, Infrastructure, Inflation, Literacy rate, Openness, Economic freedom, Political stability, Fiscal position) The 2nd one will be a little deviation to the simple regression form, the regression will be used is called semi-log form, and will be as follows lnGDP = f (FDI)

4. Data Analysis and Hypotheses Testing

The World Bank World Development Indicators (2003) defined FDI as the net amount invested or reinvested by non-residents to acquire a lasting interest (10 percent or more of voting stock) in enterprises in which they exercise significant managerial control. However there are several FDI classifications. The one would be chosen for the study is stock of FDI i.e. the total accumulated value of foreign-owned assets at a given time. Economic growth will measured by Percentage change in the GDP Market sized will measured by Real GDP per capita Growth prospect will measured by the growth of GDP Openness will measured by trade to GDP ration i.e. (Exports + Imports/GDP) Infrastructure has a wide range of indicators. However the one chosen in this study is the number of paved roads. Economic stability will measured by the amount of inflation (changes in CPI) Human capital development will be measured by the literacy rate Fiscal position will be measured by the ration of budget surplus or deficit to the GDP Political stability will be taken from the Index of political stability data

5. Discussion of Findings and Recommendations

Appendix (B) shows the estimated regression results for the 1st set test. The 1st variable RGDP growth per capita shows significant positive, which implies that growth of income per capita is related positively with FDI as it reflects consumption ability of the people in the economy. Also the RGDP that reflects the market sign shows a positive significant sign, which implies that Bahrain market is large enough to be attractive for FDI. However, on the infrastructure side, paved roads shows a positive coefficient, which follows the common sensual sign suggesting that as more paved roads will enhance transportation and easy movement from place to place, but unfortunately it was insignificant. Human development measured by adult literacy and found positive significance, because for sure availability of skilled and knowledgeable workers will enhance operation and in return it attracts FDI. An important finding shows inflation to have a negative and significant sign, which means that FDI are encouraged by low inflation low. Hence, high inflation reduces FDI. Bahrain is well integrated with the globe so its not surprising to find its economic freedom and openness to have a positive significant signs and reflects a good contribution to FDI flows. Fiscal position shows a positive significant sign, as Bahraini government doesnt impose taxes, this feature found attractive to FDI. Political instability shows a negative sign with significance, indicates that Bahrain political problem has to solve so that peace and stability will come ahead, otherwise this factor affects FDI negatively and will cause decreases in FDI flows. R squared, which measures how independent variables can explain variation of dependent variable found to be very strong at 91.2%, which indicates that the mentioned determinants can explain 91.2% of the changes in FDI. And for the 2nd set, I found that with 5% significance interval that explanatory variable 1=0.115 and therefore the FDI causes a positive effect to the growth of GDP by 11.5% which is consistent with the most literature in this area. The regression slope coefficient o=8.856 which implies the absolute value of GDP without FDIs. But still the impact of FDI in GDP growth is weak given adjusted R square which is 0.123, implying a weak relationship. Also we can
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observe this relation from figure [4], where there are no similarity trends between growth and FDI. Appendix (C) Since mid 1990s, Bahrain has moved upon a diversified economy in an effort to avoid quick oil depletion. It has attempted to move on towards investment-liberalization path trying to attract FDI inflows. So, in this project I attempted to examine the relationship between the FDI and economic growth, and to analyze key determinants for FDI in Bahrain. Bahrain has been keen towards attracting FDI perhaps of low oil reserves, however, it enjoys strong financial stability so Bahrain have seen FDI as a tool that enables the country to grow industrially and economically and become one of the leading economies in the region despite its small size and also to enhance the managerial and technological tactics which will influence labor market, income, prices, and trade. Bahrain is considerer at its birth stage towards FDI as more and more projects are building around in multi-sectors that aimed to be achieved by 2030. But theres a considerable increase in its inward FDI, and Bahrain is in change of its policy to improve FDI in its economy. The empirical results conducted that most determinants chosen had positive significant impact of FDI other than economic stability measured by inflation levels and political stability. The finding can be summarized as follows: The positive and significant effect of real GDP growth emphasizes the crucial role of the economic growth in attracting and stimulating FDI. And also high prospects of growth per capita income which signals foreign investors to conduct business as consumers have the ability to spend. In this regards, enhancing economic performance and growth is vital for FDIs. Unfortunately, infrastructure, which is measured by paved roads shows a positive but not significant determinants to the FDI, which means that it contributes positively towards FDI encouragement but further development in infrastructure in necessary which is an essential for the productive business environment. And therefore, there should be a concentrated effort to upgrade Bahrains infrastructure. Human capital not surprisingly- had positive significant coefficient which implies that Bahraini people are able to attract FDI but their level of education which is I consider as an asset to Bahrain to have such high level of skilled people. The negative and significant inflation coefficient signifies the importance of a more focused macro economic policy environment that strengthens the economy and builds confidence for potential investors. Necessary steps have to be taken to contain inflation and stabilize exchange rate through the adoption of sound fiscal and monetary policies even though the current fiscal coefficient is positive and significant. The significantly positive effect of openness and economic freedom on FDI indicates that an efficient environment that comes with liberalized economy is likely to attract foreign investors. To induce more FDI to Ethiopia, the government needs to focus on improving the investment climate through further measures of liberalization as well as creating efficient bureaucracy that facilitates entry and speedy operation of foreign investors. Further measures aimed at encouraging privatization and the promotion of the domestic private sector too is essential for the inflow of FDI depends to a degree on how the domestic private sector is treated. The significantly negative effect of political stability highlights the need of a big political reform that will in turn will encourage FDI and keep current FDI in Bahrain. And the other main of finding of the study is that FDI in highly correlate to GDP, which measures the economic performance, and growth FDI can only explains 12.3% of the growth in GDP which found to be weak explanation towards economic growth from the FDI side. In particular, findings indicated before that economic growth also promote FDI, meaning that higher GDP is a driving force behind the surge in FDI inflows. The issue stated above has important policy implication, as results shows that there is a positive bidirectional way between FDI and GDP growth. Therefore, promotional policies to encourage inward
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flows of FDI only may become nonsense. Instead, efforts should be directed to both potential sources of growth and FDI. Once growth is enhanced and stimulated, foreign capital will then be attracted. Perhaps one explanation of why GCC countries and Particularly Bahrain still far behind other developing country, such as Singapore. One important reason could be the economic growth of the region and dependency on oil, which makes it a bit volatile because of changing in oil prices. Nevertheless, FDI externalities may have trivial effects if the links with local business were weak. Thus, policies should be adopted to strengthen the relationship between FDI and domestic investments and such relationship has to be complementary rather than competitive. It is also important to adopt policy measures to deepen the domestic capital markets by increasing savings and developing a strong domestic institutional investor base and strengthening the prudential supervision of financial markets. Privatization is being used, with great success in many developing countries, as a vehicle to deepen capital markets and encourage foreign direct investment. While all GCC countries started the process of privatizing state-owned enterprises and opening up private investment opportunity in telecommunications, airlines, tourism, and some industries such as petrochemicals, cement, and utilities, more effort should be put to expedite the process toward decreasing the role of the government in the market and providing better incentives and institutional requirements for private investment. The following recommendation can assist to accelerate FDI in Bahrain: 1. Develop a clear foreign investment which includes, foreign investors manual which provides all necessary information 2. The government should keep working on improving transparency, removing bureaucratic stumbling blocks, fighting corruption, establishing the right level of supporting infrastructure, and providing support for SMEs to provide foreign investors with a growing number of potential local partners. 3. There is a need to guide FDI to high-value-added activities like education and to establish R&D facilities in order to create higher levels of technical skills suitable for the demands of industry. The education and training programmes provided by the government to nationals did not reduce the reliance of the private sector on foreign expatriates except in financial services. The financial service is well developed and benefited from Bahrains cooperation with the IMF and other international organizations. 4. The development of regional industry clusters in selected industries, through joint ventures, marketing, research and development is likely to promote intra-region investment so as to enhance the GDP. Hence, Bahrain ability to attract FDI 5. Accelerate the process of privatization due to increased efficiency and reduce government expenditure so that it focus on developing infrastructure. 6. Develop the stock market due to its ability to enhance competition and it is an indicator of economic conditions

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E. G. Lim (2001) Determinants of, and the relation between, foreign direct investment and growth: A summary of the relevant literature IMF Working Paper F.T. Knickerbocker (1973) Oligopolistic Reaction and Multinational Enterprise Harvard Business School Press John H. Dunning (1977) Trade Location of Economic Activity and the MNE J. Lewis (1999), Factors Influencing Foreign Direct Investment in Lesser Developed Countries The Park Palace Economist, P.99-107 J. Morisset (2000), Foreign Direct Investment in Africa: Policies Also matter. UNCTAD: Transnational Corporation P.107-125. K.Mellahi, Guermat, Frynas, & Al Bortamani Motives for Foreign Direct Investment in Gulf Cooperation Countries Mahmoud Al-Iriani & Fatima Al-Shamsi Foreign Direct Investment and Economic Growth in the GCC Countries Muawya Ahmed Hussein (2009) Impacts of Foreign Direct Investment on Economic Growth in the Gulf Cooperation Council (GCC) Countries International Review of Business Research Papers Peter Buckley & Mark Casson (1976) The Future of The Multinational Enterprise Raymond Vernon (1966) International Investment and Trade in the Product Life Cycle Quarterly Journal of Economics P. 190-207 R.E. Lipsey (2002) Home and Host Country effects of FDI National Bureau of Economic Research (Working paper) S. Hood & S. Young (1979) The Economics of The Multinational Enterprises S. Lall (2002) FDI and development Research issues in the emerging context Foreign Direct Investment: Research Issues S. Onyeiwu & H. Shrestha (2004) Determinants of Foreign Direct Investment in Africa Journal of Developing societies Schneider & Frey (1985) Economic And Political Determinants Of Foreign Direct Investment World Development P.161-75 Y. Aharoni (1966) The Foreign Investment Decision Process Cambridge, Mass: Harvard University Press X. Li & X. Liu (2005) Foreign Direct Investment & Economic Growth World Development 33 P.393-413

Appendix (A)
Figure 1: Bahrain, Level of inflation 1990- 2009

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Figure 2: Range of taxes in GCC countries

Figure 3: Index of human development 1980-2010 / Source: United Nations

Table 1:
Bahrain Saudi Kuwait UAE Oman Qatar

Average Monthly salary in GCC Countries in US dollars / Source: Gulf Talent

GM-MNC 13,830 19,600 16,240 16,890 14,800 17,150 GM-Local 10,760 13,870 12,230 12,500 11,500 13,490 Head of HR 8,080 11,280 9,360 16,820 8,850 9,900 Head of IT 7,350 9,830 8,150 8,900 7,500 9,470

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Appendix (B)
To avoid multicollinearity (perfectly correlated variable so, dropping one of them wont change the result) I have designed a correlation matrix as follows
RGDPG Per capita Roads, paved (% of total roads) -0.04 -0.04 1 0.59 0.97 0.31 -0.02 -0.23 0.11 0.60 0.97

Fiscal position

Literac y rate

Inflatio n

Openness

Economic freedom

RGD P

Political stability

FDI

1 0.05 0.10 0.05 0.07 -0.45 0.42 0.09 0.00

0.05 0.10 0.05 0.07 -0.45

0.59 0.97 0.31 -0.02 -0.23

1 0.64 0.56 0.34 0.07 0.32 0.02 0.63

0.64 1 0.36 -0.03 -0.32 0.19 0.59 0.96

0.56 0.36 1 0.05 0.09 -0.03 -0.31 0.33

0.34 -0.03 0.05 1 0.25 0.22 -0.51 -0.04

0.07 -0.32 0.09 0.25 1 -0.19 -0.50 -0.13

0.32 0.19 -0.03 0.22 -0.19 1 0.07 0.12

0.02 0.59 -0.31 -0.51 -0.50 0.07 1 0.52

0.63 0.96 0.33 0.04 0.13 0.12 0.52 1

0.42 0.09

0.11 0.60

0.00

0.97

RGDPG Per capita Roads, paved (% of total roads) Fiscal position Literacy rate Inflation Opennes s Economi c freedom RGDPG Political instabilit y FDI

And the coefficients using OLS estimation with chosen significance level of two-tailed 5% at degree of freedom=18 for all variables will be ranging from +2.101 to -2.101
RGDPG per capita Paved roads Inflation Literacy rate Openness Economic freedom RGDP Political Instability Fiscal position Coefficient 0.976 118.4 -5.28 35.1 0.166 26.63 1.709 -0.2595 4.449 T-test 0.22 3.17 -0.2 0.91 0.16 1.49 0.28 -0.26 0.53

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Appendix (B)
Figure 4: Relation between FDI and GDP growth 1990-2209

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