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This paper explores the institutional determinants of FDI in Oman and the role of FDI in enhancing Oman's economic diversification strategy. Time series data was collected for the selected institutional factors influencing FDI during the period 1996–2018. Unit root and Granger causality framework were used in the analysis. Results indicated that strong and clear property rights protection, corruption freedom, fiscal and trade freedom, cause FDI inflows in Oman, whereas business freedom had no effects. It is crucial for policy makers in Oman to strengthen these institutional factors, craft and implement a policy framework to sustain their efficacy, while improving business freedom towards an open economic model. This also includes strengthening the legal framework, combating corruption and reducing subsidies and other forms of favouritism towards state‐owned enterprises. Such policy measures, aimed at channelling FDI flow towards targeted sectors, would enhance Oman's diversification strategy and foster economic growth and development.

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