NONLINEAR RELATIONSHIP BETWEEN ECONOMIC DEVELOPMENT AND FDI IN IRAQ: EVIDENCE FROM NARDL (2000–2024)

Abstract

This study uses the NARDL model, one of the contemporary standard techniques that may show asymmetric correlations between economic variables, to examine the nonlinear link between economic development and foreign direct investment in Iraq between 2000 and 2024.  Foreign direct investment (FDI) flows, real GDP (a measure of economic progress), and a few control variables like trade openness and inflation were all based on World Bank statistics. The estimation results showed that there is a long-term nonlinear relationship between foreign investment and economic development in Iraq, as an increase in investment flows leads to improved growth at a higher rate than the effect of a decrease in those flows. Short-term results also showed that positive shocks to foreign investment leave a limited immediate impact, while negative shocks extend over a longer period, reflecting the fragility of the Iraqi economic environment in the face of external fluctuations. The results of the findings show that the institutional environment has to be consolidated and more confidence of foreign investors in the country has to be strengthened in order to achieve sustainable development in Iraq. As far as the policy implications of the findings of the study are concerned, it has to be noted that the Iraqi government has to implement a package of institutional reforms that transcend mere formal aspects in order to address the fundamental obstacles to investment. As the oil sector dominates the country's resources, foreign direct investment is considered to be an important lever for the diversification of the economy, under the condition of an unambiguous legal environment that protects the rights of investors and facilitates the licensing procedures. As the findings of the analysis show, the changes in the global oil prices make the Iraqi economy more vulnerable to the fluctuations of the investment flows, and the creation of a financial cushion has to be considered.