The asymmetric impact of global economic policy uncertainty on FDI in the GCC countries

Abstract

This study examines the impact of global Economic Policy Uncertainty (EPU) on foreign direct investment (FDI) inflows into the Gulf Cooperation Council (GCC) countries, a region where investment plays a critical role in economic diversification beyond hydrocarbons. The purpose is to assess whether uncertainty discourages foreign investment and whether its effects are symmetric when uncertainty rises versus falls. The analysis uses annual data for the six GCC economies covering the period 1997–2023. Both linear and nonlinear panel autoregressive distributed lag (ARDL) models are employed to capture symmetric and asymmetric long-run dynamics, while controlling for GDP growth, gross fixed capital formation, trade openness, oil rents, and regulatory quality. To complement these econometric estimations, the study applies supervised machine learning methods, Random Forest and Decision Tree regression, to evaluate the predictive importance of macroeconomic and institutional determinants. The results demonstrate that EPU significantly reduces FDI inflows across the GCC, with both increases and decreases in uncertainty exerting negative effects, reflecting persistent investor caution. Gross fixed capital formation and oil rents emerge as positive drivers of FDI, whereas trade openness shows a counterintuitive negative impact. The machine learning analysis reinforces the importance of trade openness, EPU, and GDP growth as dominant predictors, with Random Forest delivering superior predictive performance relative to Decision Trees. The findings highlight the importance of reducing policy uncertainty and strengthening institutional credibility to attract sustainable FDI. For resource-dependent economies like the GCC, enhancing regulatory quality, investing in infrastructure, and diversifying trade strategies are key to mitigating vulnerability to global uncertainty shocks.