This research aims to focus on how institutional barriers in the Arab region may account for losses in FDI inflows along with their potential technology spillover effects, as well as to show the deficiency of absorptive capacities serve as an important factor for attracting inflows. The analysis relies on endogenous growth models at an aggregate regional level and microeconomic firm – level. Findings based on linear OLS regressions, reveal a positive correlation between improved institutional factors and potential FDI spillovers, with significance varying in certain countries. Policy implications involve having targeted FDI policies to enhance absorptive capacities, improving information asymmetry to reduce corruption, and enhancing the labor market regulatory framework to improve human capital development as an incentive for FDI inflows.