Arab countries, being incapable to significantly benefit from the surge of global FDI, seem to benefit more from intraregional FDI recently fuelled by the massive surpluses in oil producing countries. The need to understand the determinants of intra Arab FDI is highlighted using an augmented gravity model based on panel data of 17 Arab countries over the period 1998-2007. Basic gravity model explains part of the FDI variations, however when accounting for country heterogeneity the fit of the model increases considerably. Intra Arab FDI is very erratic and unevenly distributed between countries. Total bilateral trade and proximity in terms of distance, border and business language are very significant due to FDI concentration within GCC area. Investment freedom encourages FDI inflows, despite the fact that other aspects of economic freedom are negatively related to FDI inflows. This probably due to the fact that countries encourage foreign and Arab investments through specific laws. Likewise, infrastructure quality negatively affects Arab intraregional FDI likely because it is widely directed to infrastructure services and in countries with poor performance in this sector. Results are disappointing with regard to institutional variables likely due to similarities between source and host countries. Investment and fiscal treaties are not relevant and control of corruption was found to negatively related to investments. Investors, used to deal with corruption in their own countries, probably do not regard it as a severe constraint to investments. Inversely, quality of regulatory environment is shown to positively affect intraregional FDI, indicating what should be done in terms of improving business environment, controlling corruption and risks as well as deepening cooperation.