Digital Banking, Financial Inclusion and FDI Inflows: Reassessing the Institutional Channel in Arab Countries

Abstract

This study provides a comprehensive reassessment of the nexus between digital banking, financial inclusion, and foreign direct investment inflows within ten Arab countries over the period from 2010 to 2021, with a specific focus on the Institutional Channel hypothesis.

Utilizing Principal Component Analysis (PCA) to construct multidimensional indices, the research employs a panel data methodology, investigating the long-term impact on foreign direct investment inflows when considered in isolation from institutional quality.  

The evidence concludes that digital transformation within the banking sector has not yet reached the threshold of significance required to pivot foreign capital flows independently.  The empirical inquiry into the Arab region’s financial landscape yields nuanced insights that challenge simplistic assumptions regarding technological adoption. The findings reveal that while digital banking and financial inclusion are rapidly evolving, their individual capacity to stimulate foreign direct investment remains statistically latent in the long term