Examining the impact of selected macroeconomic drivers on foreign direct investment inflows in the UAE

Abstract

Foreign Direct Investment (FDI) has contributed to fostering sustainable growth, leading to its wide examination in developed countries. However, its main macroeconomic drivers in emerging economies like the UAE remain underexplored. Hence, the study has as its objective the examination of the factors that drive FDI into the UAE over the period 1990-2024. The analysis in this study employs a combined methodological approach, integrating the Gregory–Hansen technique with the Autoregressive Distributed Lag (ARDL) model. The Gregory and Hansen method detects the break date in the cointegrating relationship before incorporating the dummy into the ARDL model to ensure that the results obtained are reliable and that structurally consistent estimates are produced. Long-run findings indicate that the size of economic activity and oil price uncertainty stimulate FDI inflows in the UAE, whereas lending interest rates and credit facilities dampen FDI inflows. Rising lending rates and scarce credit inflate investment costs, deterring foreign investors from doing more business. Market size was the dominant factor influencing FDI inflows in the UAE. This study recommends that policymakers strengthen growth-led FDI inflows by advancing deeper economic diversification, with a strategic focus on high-value-added, renewable energy, and technology-intensive sectors. Creating a stable financial environment through lower lending rates and improved access to credit is essential to reducing investment costs and attracting foreign investors. By reinforcing these measures, the UAE can enhance investor confidence, position itself as a competitive global investment hub, and sustain long-term, innovation-driven economic growth.