Sovereign ESG and Foreign Direct Investment in the GCC: The Amplifying Role of Trade Openness in Economic Diversification

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

Please refer to the attached file for my comments and suggestions. I urge the authors to incorporate all my comments in detail, in order to improve the scholarly quality of their work

Comments for author File: Comments.pdf

Author Response

First Reviewer:

1- Reviewer comment: “Drivers of sovereign ESG”:

Response: We appreciate your perspective. We have provided further discussion in the revised manuscript to clarify the drivers of SESG which affect FDI via their effects on SESG. The references have been updated.

2- Reviewer comment: “Instrumental variables (IV) estimation”:

Response:

Thank you for your insightful feedback on the Instrumental Variables (IV) estimation. We have carefully considered your recommendations and made the following adjustments to the methodology:

In response to your suggestion, we have implemented an Instrumental Variables (IV) estimation to account for potential endogeneity in the relationship between Sovereign ESG (SESG) and Foreign Direct Investment (FDI). Two instruments were used for this estimation:

1. Total Assets Under Management (AUM) by Institutional Investors
2. The Size of the Federal Reserve's Balance Sheet

The IV estimation is structured in two stages. The first-stage regression assesses the relationship between the instruments (AUM and Federal Reserve's balance sheet) and SESG, while the second-stage regression evaluates the impact of SESG on FDI inflows.

As suggested by the reviewer, we have dropped time-fixed effects from the specification because the instruments vary over time. Instead, country-fixed effects are retained to control for country-specific factors. The results from the IV estimation are presented in Table 6 below.

3- Reviewer comment: “Standard errors »:

Response: Thank you for your comment. In our analysis, we run a fixed effect regression with robust standards errors. That means that the fixed effects are among countries and not time. We added in the regression dummy year to take in consideration about variation among years.

 

 

 

Reviewer 2 Report

Comments and Suggestions for Authors

(1) Since there are so many abbreviations such as GCC, SESG, WDI and so on. Some of them even appear more than once, thus a Nomenclature is suggested in this paper.

(2) Authors are suggested to further elaborate on the novelty of their study compared to previous studies, particularly the unique perspective of introducing trade openness as a moderating variable when exploring the relationship between SESG and FDI.

(3) The literature review part should be expanded to include more researches on the impact of different dimensions of SESG (environmental issues, social issues and governance issues) on FDI.

(4) Authors developed two distinct models in Section 3. Firstly, some symbols or notations are not well explained and what are these meanings? Secondly, the differences between the two models/equations are unclear, which deserves a clear statement. Thirdly, how to verify the rationality and feasibility of the models. Are other works/studies are referenced during the model establishment process? If yes, cite them properly in the text.

(5) When evaluating the implementation effectiveness of SESG in a GCC country, how to ensure that these indicators can comprehensively reflect your investigated problem?

(6) The experimental results have enlightening implications for policy-making in GCC countries. It is suggested that the author further consider the specific situations of different countries in their Discussion part.

(7) The Conclusion section should also briefly discuss the limitations of this study.

Author Response

2nd Reviewer:

1- Reviewer comment: “Nomenclature is suggested in this paper”:

Response: We have included the Nomenclature in.

 

2- Reviewer comment: “Authors are suggested to further elaborate on the novelty of their study compared to previous studies, particularly the unique perspective of introducing trade openness as a moderating variable when exploring the relationship between SESG and FDI”.

Response: Thank you for your suggestion to elaborate on the novelty of our study. In response, we have revised the Introduction and emphasized the unique contribution of our research. Specifically, our study explores the moderating role of trade openness in the relationship between SESG (Sovereign Environmental, Social, and Governance) factors and Foreign Direct Investment (FDI) in the Gulf Cooperation Council (GCC) countries.

While previous studies have examined the direct effects of SESG on FDI, the role of trade openness as a moderating factor has received limited attention. By introducing this variable, we offer a more comprehensive analysis of how trade openness can amplify or diminish the effects of SESG on FDI. This approach provides a nuanced understanding of the conditions under which SESG factors have a stronger or weaker impact on FDI, which is particularly relevant for policymakers in economies transitioning from oil dependency, such as those in the GCC.

Additionally, we have revised the Literature Review section to include additional details on the novelty of this study compared to previous studies. We believe this enhances clarity and rigor. The references have been updated.

3- Reviewer comment: “The literature review part should be expanded to include more researches on the impact of different dimensions of SESG (environmental issues, social issues and governance issues) on FDI”

Response: We appreciate this suggestion. The literature review has been expanded and additional studies have been added to enhance clarity regarding our literature part. The references have been updated.

4- Reviewer comment: “Authors developed two distinct models in Section 3. Firstly, some symbols or notations are not well explained and what are these meanings? Secondly, the differences between the two models/equations are unclear, which deserves a clear statement. Thirdly, how to verify the rationality and feasibility of the models. Are other works/studies are referenced during the model establishment process? If yes, cite them properly in the text ».

Response:

Thank you for your valuable feedback on our manuscript. We have carefully addressed each of your concerns regarding the models presented in Section 3, as outlined below:

In response to your first point, we have revised Section 3 to ensure that all symbols and notations used in the equations are clearly defined and explained. Specifically, we added a detailed subsection titled Definitions of Variables, where each symbol is described along with its corresponding meaning and measurement units.

To address your second concern, we have provided a clear explanation of the differences between the two models in Section 3. The first model examines the direct relationship between SESG and FDI, testing whether stronger Sovereign ESG performance leads to higher FDI inflows. The second model incorporates the moderating effect of trade openness, investigating how trade openness influences the SESG-FDI relationship by including an interaction term.

In response to your third point, we have added a new subsection titled Justification of Models in Section 3, where we provide references to relevant studies that use similar econometric techniques.

5- Reviewer comment:  When evaluating the implementation effectiveness of SESG in a GCC country, how to ensure that these indicators can comprehensively reflect your investigated problem?

Response:

Thank you for your insightful comment. To ensure that the selected Sovereign Environmental, Social, and Governance (SESG) indicators comprehensively reflect the problem of attracting Foreign Direct Investment (FDI) in GCC countries, we have carefully selected these indicators based on their relevance to both global ESG standards and the unique challenges facing the GCC region.

We justify the use of these SESG indicators as they align with recognized global frameworks such as the Principles for Responsible Investment (PRI) and the United Nations Sustainable Development Goals (SDGs).

Furthermore, by incorporating trade openness and controlling for broader economic variables in our regression models, we ensure that our analysis reflects the complex interplay between SESG performance and FDI inflows. This approach captures not only the direct effects of SESG but also how these factors operate within the broader economic and governance frameworks of each GCC country.

6- Reviewer comment: The experimental results have enlightening implications for policymaking in GCC countries. It is suggested that the author further consider the specific situations of different countries in their Discussion part.

Response:

Thank you for your insightful comment regarding the need to consider the specific situations of different GCC countries in the discussion. In response, we have added a new sub-section titled "Country-Specific Considerations within the GCC" in the Discussion section of the manuscript.

In this new sub-section, we address the unique economic and political contexts of individual GCC countries, such as Saudi Arabia’s Vision 2030, the UAE’s advanced trade infrastructure, Kuwait’s reliance on oil, Qatar’s sustainability efforts, and the distinct strategies of Oman and Bahrain. This addition highlights how these country-specific factors influence the relationship between SESG initiatives and FDI, as well as how tailored policy approaches can maximize foreign investment across the region.

7- Reviewer comment:  The Conclusion section should also briefly discuss the limitations of this study.

Response:

Thank you for your insightful comment on the limitations of our study. We have added a section in the conclusion that addresses the following limitations:

1. Generalizability: Our findings may be limited to the GCC region due to its unique economic and geopolitical factors.
2. Data Comparability: Variations in SESG metrics across countries may affect the consistency of results when applied globally.
3. Unobserved Variables: Certain factors, such as geopolitical tensions or global trade shifts, which were not included in the model, may also influence FDI inflows.

Reviewer 3 Report

Comments and Suggestions for Authors

I appreciate the importance and relevance of your work. However, several methodological and analytical aspects of the manuscript need significant improvement to enhance the clarity and rigor of your study.

1. The key variables in your analysis need to be more explicitly defined. Consider expanding the explanation of how these variables are relevant to your study's research questions.

2. The current statistical methods used do not seem sufficient to address the complexity of the dataset. I recommend employing advanced econometric techniques such as Quantile Regression or a similar approach to better capture heterogeneous effects across your sample. This will allow you to address variations within the dataset more effectively.

3. Your model could benefit from addressing potential endogeneity issues. I recommend considering the application of Generalized Method of Moments (GMM) estimators, which can account for potential biases introduced by unobserved factors.

4. I suggest conducting unit root tests to verify the stationarity of your time series data. Additionally, cointegration tests should be applied to establish the long-run relationships between the variables in your model.

5. The manuscript's hypotheses are broad and could be refined to provide clearer direction. I recommend breaking down the main hypotheses into more specific sub-hypotheses that are directly tied to the variables you are examining.

6. In its current form, the manuscript lacks discussion on multicollinearity among the independent variables. We suggest using correlation matrices or Variance Inflation Factors (VIF) to ensure that multicollinearity is not an issue in your model. This will help improve the robustness and reliability of your regression results.

7.  Given the nature of your data, there is a potential for cross-sectional dependence. Please conduct relevant tests such as Pesaran's CD test or the Breusch-Pagan Lagrange multiplier test to verify whether cross-sectional dependence is present. If detected, appropriate methods should be employed to account for this issue in your analysis.

Author Response

3^rd Reviewer:

1- Reviewer comment: The key variables in your analysis need to be more explicitly defined. Consider expanding the explanation of how these variables are relevant to your study's research questions.

Response:

Thank you for your insightful feedback. We have added more explication of the key variables in the manuscript

 

2- Reviewer comment: “The current statistical methods used do not seem sufficient to address the complexity of the dataset. I recommend employing advanced econometric techniques such as Quantile Regression or a similar approach to better capture heterogeneous effects across your sample. This will allow you to address variations within the dataset more effectively”.

Response:

Thank you for your valuable suggestion regarding the introduction of Quantile Regression. To address the complexity of the dataset and ensure robustness, we have already implemented the Generalized Method of Moments (GMM) estimation. This approach is particularly useful for addressing endogeneity concerns and dynamic relationships between variables, especially in the context of panel data. GMM allows us to control for unobserved heterogeneity, serial correlation, and cross-sectional dependence, which are crucial in understanding the interaction between Sovereign ESG (SESG) performance, FDI inflows, and trade openness.

The GMM results reinforce the positive and statistically significant relationship between SESG and FDI, confirming that strong ESG performance enhances a country's attractiveness to foreign investors. Furthermore, the GMM model shows that trade openness amplifies this positive effect, providing further evidence of the moderating role that trade policies play in the SESG-FDI relationship. Given these findings, GMM serves as a robust and appropriate econometric method for our dataset.

 

3- Reviewer comment: “Your model could benefit from addressing potential endogeneity issues. I recommend considering the application of Generalized Method of Moments (GMM) estimators, which can account for potential biases introduced by unobserved factors”.

Response:

Thank you for your thoughtful comment regarding the potential endogeneity issues in our model and the suggestion to use Generalized Method of Moments (GMM) estimators to address these concerns. We are pleased to inform you that we have already addressed this issue in our study by applying GMM estimations as part of our robustness checks.

In the Results section of our manuscript, we have implemented GMM to account for potential biases introduced by unobserved factors. The GMM results, as detailed in Table 5, reinforce the positive relationship between SESG initiatives and FDI, while confirming that trade openness amplifies these benefits. We believe that the application of GMM effectively addresses any potential endogeneity in the model.

Thank you again for your valuable feedback, and we hope that this explanation clarifies the steps we have already taken to ensure the robustness of our findings.

 

4- Reviewer comment: “I suggest conducting unit root tests to verify the stationarity of your time series data. Additionally, cointegration tests should be applied to establish the long-run relationships between the variables in your model”

Response:

Stationarity and Cointegration Tests

In response to the reviewer’s suggestion, we conducted panel unit root tests to verify the stationarity of our time series data. Specifically, we applied the Levin-Lin-Chu (LLC) and Im-Pesaran-Shin (IPS) tests to each of the key variables in our model, including FDI inflows, SESG performance, trade openness, and other macroeconomic indicators. The results from both tests indicate that the majority of the variables are non-stationary at levels but become stationary after first differencing, confirming that all series are integrated of order 1 (I(1)).

Additionally, we performed Pedroni’s cointegration test for panel data to assess the long-run relationships between the variables. The cointegration test results suggest the presence of a significant long-run relationship between SESG performance, FDI inflows, and trade openness. This indicates that, over time, improvements in SESG and greater trade openness tend to have a lasting, positive impact on FDI inflows in the GCC countries.

By ensuring that the data is stationary and confirming the existence of long run cointegrating relationships, we have enhanced the robustness of our econometric analysis and strengthened the conclusions regarding the influence of SESG and trade openness on FDI.

5- Reviewer comment: “The manuscript's hypotheses are broad and could be refined to provide clearer direction. I recommend breaking down the main hypotheses into more specific sub-hypotheses that are directly tied to the variables you are examining”.

Response:

Thank you for your valuable feedback regarding the hypotheses in our manuscript. We appreciate your suggestion to refine them for greater clarity and direction. In response, we have devided the main hypotheses into more specific sub-hypotheses that directly align with the variables examined. This enhance the focus of our analysis and ensure that each hypothesis is clearly connected to our research objectives.

 

6- Reviewer comment: “In its current form, the manuscript lacks discussion on multicollinearity among the independent variables. We suggest using correlation matrices or Variance Inflation Factors (VIF) to ensure that multicollinearity is not an issue in your model. This will help improve the robustness and reliability of your regression results”.

Response:

Thank you for your valuable comment regarding the need to address multicollinearity among the independent variables in our analysis. In response, we have conducted a Variance Inflation Factor (VIF) analysis to assess the degree of multicollinearity between the independent variables, including SESG, trade openness, and other controls.

The VIF values for all variables were found to be below the commonly accepted threshold of 10, indicating that multicollinearity is not a concern in our dataset. Furthermore, we examined the correlation matrices among the key independent variables and confirmed that no high correlations exist that could distort the regression results.

This analysis has been included in the revised manuscript within the Methodology section under "Multicollinearity Testing" to ensure the robustness of our results.

 

7- Reviewer comment: “Given the nature of your data, there is a potential for cross-sectional dependence. Please conduct relevant tests such as Pesaran's CD test or the Breusch-Pagan Lagrange multiplier test to verify whether cross-sectional dependence is present. If detected, appropriate methods should be employed to account for this issue in your analysis”. 

Response: Thank you for you comment, the Pesaran's CD test is done with red color.

Round 2

Reviewer 1 Report

Comments and Suggestions for Authors

I thank the authors for addressing the comments I raised in the previous round of revision. The paper reads much better than the previous version. I have no remaining comments.

Reviewer 2 Report

Comments and Suggestions for Authors

Authors have successfully addressed my raised comments.

Reviewer 3 Report

Comments and Suggestions for Authors

Authors took into account all of my recommendations