2006-2007 F E M I S E R E... P R O G R A M M E

2006-2007
In collaboration with:
Youcef Benabdallah, CREAD, Algérie
Jean-Raphael Chaponnière, CEPN, Université Paris 13, France
Nassima Hamidouche, CREAD, Algérie
François Moreau, CNAM, France
Sonia Seghir, Faculté de sciences économiques et de gestion, Université
El Manar, Tunisie
Tharik Ramoun, Université Paris 12, France
Samir Zouari, Université Paris 12, France
September 2010
FEMISE RESEARCH
PROGRAMME
Research n°FEM31-20
Directed By
Marc Lautier, CEPN, Université Paris 13
Gérard Duchene, Université Paris 12
Les boucles
investissement intérieur – investissement étranger
et la croissance des pays méditerranéens
Ce rapport a été réalisé avec le soutien financier
de l’Union Européenne au travers du Femise. Le
contenu du rapport relève de la seule responsabilité
des auteurs et ne peut en aucun cas être considéré
comme reflétant l’opinion de l’Union Européenne.
This document has been produced with the financial assis-
tance of the European Union within the context of the FEMISE
program. The contents of this document are the sole respon-
sibility of the authors and can under no circumstances be
regarded as reflecting the position of the European Union.

1
RAPPORT FINAL, FEM 31-20
LES BOUCLES INVESTISSEMENT INTERIEUR – INVESTISSEMENT
ETRANGER ET LA CROISSANCE DES PAYS MEDITERRANEENS
Coordination : Marc Lautier, Gérard Duchene
Youcef Benabdallah, CREAD, Alger
Gérard Duchene, Université Paris 12
Jean-Raphael Chaponnière, CEPN, Université Paris 13
Nassima Hamidouche, CREAD, Alger
Marc Lautier, CEPN, Université Paris 13
François Moreau, CNAM, Paris
Sonia Seghir, Faculté de sciences économiques et de gestion, El Manar, Tunis
Tharik Ramoun, Université Paris 12
Samir Zouari, Université Paris 12

RAPPORT FINAL, FEM 31-20
The linkages between Domestic Investments and FDI, and the
Growth of MEDA Countries
Executive summary
Comparative analysis has demonstrated that the trade specialisation of MEDA countries has
been stable and not sophisticated. Income growth has also been weaker in the MEDA region since the
1970. The growth and exports quality gap between MEDA and ASEAN, or Central-European
countries, has often been explained by the lack of FDI inflows in the MEDA region and, thus, their
limited contribution to economic progress.
While Aid and concessional loans used to account for the bulk of resource flows to developing
countries (DC) a couple of decades ago, FDI is now the main source of external resource. The share of
FDI in total net flows grew from 29% in 1991 to 80 % in 2008 ; meanwhile the share of official flows
declined from 50 % to 3%. With few alternatives sources of foreign financing, it is not surprising that
the attitudes towards inward FDI have changed over the last couple of decades. In contrast to former
skepticism about whether FDI inflows should be encouraged at all, and to the frequent implementation
of unfriendly policies towards Multinational Corporations (MNC), policy makers, and many scholars
too, now take the beneficial effects of FDI for granted. “MNC used to be seen as the emblem of
dependency; they have now become the saviors of development” (Rodrik 1999). Implementation of
pro-FDI regulations has been encouraged by a body of literature, which insists on the positive role of
FDI in the growth and development processes. Thus, in addition to fill the traditional investment and
foreign exchange gaps, FDI can stimulate domestic investment, increase local market competition,
enlarge international market access for local products, and generate other types of externalities and
knowledge “spillovers”. While development strategies used to focus on State’s investments and

interventions, FDI is now considered as the main source of catching-up and technological
development.
FDI flows can undoubtedly promote growth. Yet, the reverse causality, from growth to international
investment attraction, may also explain the correlation. MNC location decisions should be influenced
by host-countries economic performances: it would be logical for MNCs to choice to invest in the
more profitable economies. In this context, one of the primary focus of this research is to investigate
whether domestic investment is a significant determinant of FDI in MEDA and developing countries.
It differs from most existing studies notably because it analyzes the influence of domestic performance
on international integration, rather than the impact of international integration on domestic
performance.
The first section of the report investigates the impact of domestic investment on FDI in
developing countries, using a large cross-country sample for the period 1984–2004. While the
literature has provided much studies on the effects of FDI on growth and investment in host-country,
very little is known about how domestic investment itself affects FDI inflows. Evidence from annual
data for 68 developing countries from all regions of the world suggests that lagged domestic
investment has a quantitatively significant impact on FDI inflows in the host-economy. This impact is
strongest when countries keep away from under-development status. For instance, for DC with a GDP
per capita above 1500 $, a one percent increase in domestic investment, as a percent of GDP on
average, increases FDI as a percent of GDP by as much as 0,1 %. The correlation increases also when
total FDI is replaced by greenfield or “net” FDI as the dependant variable. We conclude that domestic
investment is a strong catalyst for FDI in DC. One of the main policy implications of this result is
straightforward : the promotion of domestic firms investment will lead to more FDI inflows.
Developing countries will benefit from measures aimed at encouraging domestic investment, and a
better investment performance will efficiently stimulate FDI. The evidence suggests that active
industrial policy, aimed at enhancing the profitability and the scope of domestic investments, will be
effective to increase FDI inflows in the country. Furthermore, the study confirms that a FDI-attraction
policy can not serve as a development strategy, because FDI flows are going to developing countries
which have already a strong investment rate. Thus FDI flows where there is already a dynamic process
of economic development: our evidence suggests that MNC follow economic development.
The second section of the report analyses the role of institutions on investment behaviors in
MEDA and DC. While several papers have insisted on the role of domestic institutions on FDI
attractiveness, their impact on domestic investors is less well known. An econometric model is built
and applied to a sample of 51 emerging and developing countries to explore further this issue. A
specific feature of the MEDA countries is the lack of a strong correlation between the gross
investment rate and growth. Whereas the results suggest also a weaker than expected link between FDI

and growth. On the contrary, the role of the quality of institutions on domestic investment is clearly
confirmed.
In the third part of the report, the case of Algeria gives the opportunity to study the relationship
between investment –domestic and foreign- and the revenues from oil. Different quality of institutions,
or in the business climate, has explained the difference between resource-cursed and resource-blessed
countries. In Algeria, the favorable terms of trade have been linked to a slow and volatile growth. The
growth rate is not very high : it is close to the average of the African countries. Growth in Algeria is
exogenous, mainly led by the oil sector. Public policies have neither succeed in diversifying the
sectoral sources of growth, nor in stimulating FDI entry. The State’s budget comes directly from oil
income and it is disconnected from the rest of the national economy. This financial independence has
allowed the State to become autonomous from the national economy, the civil society and their needs.
Income tax for instance are negligible in Algeria. While the government has implemented and planned
several reform to liberalize domestic markets since 1988, evidences have demonstrated that there is
still a strong need to improve the business climate and to stimulate investment and growth.
The last chapter gives a detailed statistical analysis of investment flows in Tunisia, both domestic and
from abroad. It shows the significant increase of FDI during the recent period. They account now for
10 % of the investment total and contribute to 1/3 of exports and 1/6 of total employment. This
expansion is mainly explained by the stable political and social context, combined with the
improvement of the business climate and the robust economic growth.