The Determinants of Foreign Direct Investment and Their Impact on Growth: Panel Data Analysis for AMU Countries

Abstract

The purpose of this paper is to study the determinants of foreign direct investment (FDI) and empirically examine their effects on the growth of the Arab Maghreb Union (AMU) countries. This relationship has largely been analyzed in the economic literature. The results are mixed, some of the theoretical and empirical studies have shown that there is no positive relationship between FDI and economic growth, while others have found that FDI affect positively and significantly the long-run economic growth. Indeed, AMU countries have developed in recent years, an economic policy aimed at promoting the development of their economy. In these economies, FDI is considered as a key factor towards progress in economic sectors. This type of external funding has shown an increasing trend over time; however, the achievements of AMU countries in attracting FDI are still low compared to their potential and their performance to attract more foreign investments. In this paper, we use a dynamic panel system GMM estimator to study the determinants and the growth effects of FDI in three Maghreb countries (Algeria, Morocco, and Tunisia) during the period 1980-2010. Our empirical investigation suggests that, under particular economic and financial conditions, such as the adoption of an export promotion trade regime, restoring international competitiveness and diversification of exports, foreign direct investment affects positively the growth rate in the long run and improves the economic situation in AMU countries.

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