Modeling the Impact of Corruption, Degree of Freedom to Invest and Democracy on Domestic Investment: Evidence from MENA Countries

: This study examines the impact of corruption, investment freedom, and democracy on domestic investment in countries in the Middle East and North Africa. In order to achieve this, the GMM model was used to test the annual data from 2011 to 2017. The empirical results show that corruption has a negative impact on domestic investment, but the degree of investment freedom and democracy have a positive impact on domestic investment. One of the major contributions of this work is to assert the requirement to wheel more awareness to the direct link between corruption, governance, investment freedom, and domestic investment.


Introduction
Today's investment is one of the most important financial resources on which the different countries of the developed and underdeveloped world rely, because the most attractive countries for investment are those that are most successful in their growth.
Investment has become the economic phenomenon that characterizes the end of the 20 th century and the beginning of the 21 st century. It is one of the main pillars of economic development.
The success of investment law is also linked to its adequacy to international law and the caution of investment principles, i.e. granting investors the freedom to transfer their money, the inadmissibility of their nationalization and the recourse to international arbitration for the settlement of investment disputes. As a macroeconomic variable, it plays an important role in the economic system because it is directly related to other variables such as savings, income, employment, and growth rates. This is the theoretical aspect of the issue that is of concern to all countries, as evidenced by the growing awareness of the need to strengthen their capacity to attract foreign direct investment through financial, technical, administrative and human resource development mechanisms. Thus, the increase in the volume of investments requires the creation of adequate economic conditions. Domestic investment is defined as gross fixed capital formation in a country. It is therefore the sum of local investment and foreign investment. Domestic investment in MENA countries is divided mostly between the extractive and public sectors (services), followed by the agricultural and manufacturing sectors.
Studies on the effects of democracy, corruption and degree of freedom to invest on domestic investment in MENA countries are extremely rare. However, MENA countries have particular characteristics both in terms of their business climates (informal sector, institutional weaknesses, embryonic industry...) and in terms of political changes. These characteristics make the analysis of the relationship between the above-mentioned variables and domestic investment in this region a major theoretical and empirical challenge.
3 This work differs from other studies in two respects: (i) its focus on MENA countries; (ii) the study of the role of democracy, corruption and the degree of freedom to invest in changing the sector distribution of domestic value added.
In order to respond to this double problematic, this work is composed of five sections.
Section 2 develops a review of the literature. It is followed by the presentation of the data from our study and the empirical model in section 3. Section 4 is empirical. It consists of the interpretation of the estimation results of the econometric model in the context of a dynamic panel. Finally, the conclusion and the policy implications will be the subject of the fifth section.

Review of the literature
In what follows, we cite some empirical works that have focused on studying the impact of political variables (democracy, corruption and economic freedom) on domestic investment.

2.1.Democracy and domestic investment
Democracy is a political system characterized by political and civil liberty (Gastil, 1989). According to proponents of democracy, citizens' incentives to work, invest and allocate resources efficiently can all be maintained in a climate characterized by political and economic freedom, free flow of information and protection of property (North, 1990).
Democracy can have negative effects on the economy if political and social demands turn into strikes and demonstrations that disrupt business activity and force entrepreneurs to stop their activities and leave the country. Continued protests and strikes can even discourage foreign direct investment inflows. Therefore, the impact of democracy on growth can only be negative or negligible. The type of the connection between political regime and growth can also be affected by political instability. The results of the theoretical work suggest that the link between democracy and growth can be influenced by political instability. Tabellini (1989), Özler andTabellini (1991), Cukierman et al. (1992) argue that political instability considerably reduces the time horizon, not only of the investor, but also of the political decision-maker. In a democratic regime, the latter is then satisfied with a wait-and-see management of power, particularly in the economic field. The big changes needed are then dodged. This type of effect is particularly noticeable in weak 4 democracies, where the partisan system is very fragmented. A government with a short time horizon may also choose to run away from power and pursue a worst-case economic policy that it hopes to reap the benefits in the medium term (failure of its successor). Similarly, a government with a short time horizon has no incentive to respect either its commitments or the rules and principles that should, in principle, regulate economic activity (property law, contract law, taxation, etc.), Clague et al. (1996).
Furthermore, Fosu (1992) points out that the probability of capital loss rises in the presence of political uncertainty, which decreases the amount of investment actually undertaken. The unstable country then sees national and foreign investors turning away from the opportunities offered by the national economy. The consequences for growth can be serious: a decline in investment, deterioration in export performance, and difficulties in financing private and public projects. Moreover, Alesina and Perotti (1996) found that the connection among political instability and economic growth tend to a rise at risk and a decline in investment due to the volatility of the political climate.
The experiences of several countries, especially the Arab Spring countries (Tunisia, Libya and Egypt), which have undergone a change of political regime reveal that the transition to a more democratic political regime can be followed by political instability affecting development. Evidence from these three countries indicates that a phase of transition to democracy can be accompanied by political instability that may adversely affect growth. This implies that the impact of democracy on investment depends on political stability.
For example Kurzman et al. (2002) argue that democracy reduces investment because the unpopular policies that allow investment are not enforced by democratic regimes. Acemoglu et al. (2008) claim that, due to their redistributive tendencies, political institutions generate distortions.
In the period 1960-2004, Aisen and Veiga (2013) studied a sample of 169 countries and found that authoritarian regimes limit development by reducing the accumulation of physical and human resources.
However, the empirical results of Zouheir and Karim (2012) analysis, using a dynamic panel data model, to define the connection between democracy, investment 5 and economic growth for a sample of 11 countries from the MENA region during the period 2000-2009, show that there is a significant correlation between democracy and investment on the one side and on the other side between civil liberties and economic growth. The findings also highlight a positive connection between investment and political rights.
Also, for a sample of 79 countries over the period 1984-2008, Makrem and Faycel (2018) tried to test this relationship and to incorporate the notion of political stability as a complementary variable for democracy. The key findings indicate that democracy impacted significantly growth in a politically stable climate. The findings of the work are heterogeneous, implying that the influence of democracy on domestic investment is far from obvious.

2.2.Corruption and domestic investment
Corruption is an international scourge. While its existence, degree and scale vary from a country to another, it is a phenomenon that affects all nations: it affects the most advanced, the least developed, the wealthiest and the poorest nations.
Corruption has several forms, such as bribery, embezzlement, influence peddling, abuse of office, illicit enrichment, fencing, money laundering, tax evasion, nepotism, revolving doors between the government and the private sector, conflict of interest, and so on.
Numerous studies have established that corruption disheartens investment and is an additional cost to businesses, reducing the profitability of investment projects.
First, empirical evidence proposes that corruption reduces the investment/GDP ratio, lowers the level of investment and significantly retards economic growth (Mauro, 1995).
Corruption also distorts the dynamic cycle related with public investment and influences the distribution of public spending. Corruption can induce public officials to distribute public funds, but in compliance with the corrupt opportunities they provide, such as major infrastructure or defense projects. Mauro (1998) argues that public spending on education as a proportion of GDP is negatively correlated with the level of corruption in most countries. Same, four mechanisms by which corruption impacts economic development have been established by Tanzi and Davoodi (1997): 1. higher public expenses; 2. lower public 6 funds; 3. decreased public spending on some turfs, such as health or education; and 4. poorer quality public infrastructures.
In addition, some researchers have empirically shown that corruption decreases the output of capital and constitutes an important factor in the decision-making of investors. According to the findings of Lambsdorff (2003), an increase in corruption by one point on a scale of 0 (highly corrupt) to 10 (highly clean) decreases an output by 4 percent of GDP and 0.5 percent of GDP by net capital inflows. Campos et al. (1999) suggest that investment is not only influenced by the degree of corruption, but also by the essence of corruption. Corruption systems that are more stable than those that demand government favors have less harmful investment consequences than those that are less predictable. (2009)  developing and transitional countries covering the period 1984-1999 that bypasses these issues. They notice that the effect of corruption appears to be more ambiguous on the level of public investment than has been found in previous literature. They do, nevertheless, notice that the impact of corruption on private capital accumulation is significantly more detrimental than what was previously discovered. They also notice that corruption's impact on governance is unambiguously negative, further deterring economic growth.

Asiedu and Freeman
For the period 2004 to 2013, Zakharov (2019) studied the causal correlation between corruption and fixed capital investments in the Russian regions. By adding novel instrumental variables for corruption, they fix the issue of endogeneity: the existence of the free press and abuses of the freedom of journalists. The key finding is that corruption affects significantly and negatively aggregate investment in fixed capital.
He found that, by disaggregating investment by ownership, corruption reduces private investment, and not the investment that is made by state-owned firms. For businesses 7 with international investment, the influence is greater. A strong negative association between regional imports of capital goods and corruption has also been observed. To conclude, the domestic investment effect of corruption is negative.

2.3.Degree of freedom to invest and domestic investment
The principle of the freedom to invest, seen from the point of view of the right of establishment, is recognized in post-1945 1 commercial treaties, but is not nowadays the subject of a precise definition. This seems normal so far as the notion of investment itself is not defined. Several projects have been launched on the subject of freedom of investment 2 . These projects have opened a debate on the subject. They have confirmed the need to recognize certain fundamental principles in favor of foreign investors, namely transparency, liberalization and non-discrimination.
Nevertheless, they did not succeed in finding a common definition of the term.
Consequently, it is up to each state to set its own conditions governing the admission and treatment of investment on its territory.
Despite the scarcity of a dense literature on studies of the effect of economic freedom on domestic investment, studies on the effect of economic freedom on FDI are extremely frequent.
In a sample that includes 18 Latin American countries, Bengoa and Sanchez-Robles (2003) analyzed the link between economic freedom, FDI and economic growth using panel data. Their findings suggest that economic freedom leads to FDI inflows in a favorable way.
In his research, Quazi (2007) explored the correlation between economic freedom and FDI in seven countries in East Asia (China, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand). The results showed that a significant determinant of FDI investments is economic freedom.
The link between economic freedom and FDI has been explored by Heriot and Theis (2008). The outcome found that in drawing FDI, nations with more economic independence were more competitive. In a report for Middle East countries and European countries in Africa, Caetano and Calerio (2009) studied the association between economic freedom and FDI. As a result of the research, it was determined that the association between economic freedom and FDI was favorable. shows that FDI is statistically strongly affected only by fiscal and trade freedom. As a result, the report urges south Asian countries to boost their domestic investment climate in order to draw more foreign capital.
The role of economic freedom of the host country in bilateral direct investment was examined by Xu (2019). With a selection of 155 countries, he has researched this topic in a gravity model. He has also used some efficient gravity model estimation techniques to combine the zero observations and the quantile regression approach adopted. The results show that both home-country and host-country economic freedom are positively associated with bilateral direct investment and that homecountry economic freedom has much greater explanatory capacity for foreign direct investment. Therefore, the promotion of economic freedom could attract more foreign direct investment from outside than direct investment from within.
Motivated by this background, we note that FDI is positively affected by the degree of freedom to invest. In our study, we try to understand the nature of the relationship between the degree of freedom to invest and domestic investment in a better way.

3.1.Data description
The selected countries respect the ranking and analysis of the World Bank. The sample includes the MENA Countries depending on the availability of data. In total, our sample comprises 9 countries (Algeria, Egypt, Iran, Lebanon, Morocco, Oman, Saudi Arab, Tunisia and Yemen), and the estimation period is from 2011 to 2017.

3.2.Variables and sources of data
To study the impact of Democracy, Degree of freedom to invest and corruption on domestic investment, we will apply a linear estimation of panel data that has 8 variables whose reason to clarify this effect. The following table defines the variables and the data source of each variable.

3.4.Definitions of variables
Our empirical methodology is based around the estimation of 8 variables. In this paragraph, we will present the definitions and tools for the use of its variables.

4.4.Model specification and empirical methodology
In this paper, we create a model dealing with domestic investment as a dependent variable. In this model we apply as independent variables: Corruption Perceptions Index, Democracy Index, Degree of freedom to invest, Human Development Index, Foreign direct investment net inflows (% of GDP), Final consumption expenditure (% of GDP) and GDP growth (annual %).
The basic model is written as follows: The empirical format of this model is written as follows: 13

Empirical Analysis
The estimation of the equation (2) gives the substituted coefficients which are written as follow in the equation (3)  14 The econometric rule states that the relationship between the X and Y variables in a regression model is statistically significant when the probability of the coefficient (Prob) is less than 10%. With: ✓ Prob < 1% means a strong significance.
✓ Prob < 10% means a low significance.  All residual diagnostic tests are satisfactory and assert that our model is acceptable and well treated (R² is greater than 60% and the probability of Jarque-Bera is greater than 5%).

Conclusion
This research examines the impact of corruption, degree of freedom to invest and democracy on domestic investment in MENA Countries. In order to achieve this purpose, annual data for the periods between 2011 and 2017 were tested using GMM 15 model. Empirical results show that corruption has a negative effect on domestic investment, however, the degree of freedom to invest and democracy have a positive effect on domestic investment.
Indeed, corruption is a global scourge. Although its nature, degree and extent differ from one country to another, it is a phenomenon of concern to all countries: it affects the most developed countries, the least developed, the richest and the poorest.
Likewise, corruption erodes community and investor confidence in the country. In general, corruption discourages investment, which hinders economic growth. In fact, empirical evidence indicates that corruption reduces investment. One of the main reasons corruption discourages investment is that it increases the cost of doing business, which reduces the profitability of the investments. In this context, and according to the OECD (2016), bribes and difficult and drawn-out negotiations increase transaction costs, thus increasing the costs of economic activity in general.
Bribes and other illegal fees act as a "hidden tax", which increases the cost of the investment. Likewise, corruption often involves heavy bureaucracy with many steps, including unnecessary delays and procedures that increase the chances of collecting bribes.
Corruption affects all countries and undermines sustainable development. As indicated in the report, corruption can negatively affect the productivity of the private sector because it discourages investment. It also harms competition and entrepreneurship. Then, corruption can have negative effects on states' public revenues. Indeed, corruption undermines the ability of states to collect taxes. Finally, corruption can disrupt the decision-making process leading to public investment and thus can have negative effects on the state's public spending, particularly by limiting its efficiency. It should be borne in mind that corruption also affects other determinants of economic and social well-being, such as sustainable development, health, education and access to water.
The overall policy message in this article is very straightforward: reducing the level of corruption in a country will help domestic investment and ultimately help increase economic growth. There is still much work to be done in terms of the interaction between corruption and the accumulation of domestic investment and its impact on economic growth. One of the main contributions of this article is to emphasize the importance of paying more careful attention to the direct link between corruptions rather than the direct link between corruption, governance, investment freedom and domestic investment.