The Relationship Between Trade FDI and E PDF

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ECOSYS-461; No. of Pages 19
Economic Systems xxx (2014) xxxxxx
Contents lists available at ScienceDirect
Economic Systems
jo urnal home page : www.elsevier.com/loc ate/ecos ys
The relationship between trade, FDI and

economic growth in Tunisia: An application of
the autoregressive distributed lag model
Mounir Belloumi a,b,*
a
b
Faculty of Economics and Management, LAMIDED, University of Sousse, Tunisia

Faculty of Administrative Sciences, Najran University, Saudi Arabia
A R T I C L E I N F O
A B S T R A C T
Article history:
Received 22 October 2012
Received in revised form 22 June 2013
Accepted 7 September 2013
The relationship between foreign direct investment (FDI), trade

openness and economic growth in host countries remains one of the
most important issues in the economic literature and met with
renewed interest in recent years mainly for countries suffering from
unemployment problems and lack of technological progress. This
paper examines this issue for Tunisia by applying the bounds
testing (ARDL) approach to cointegration for the period from 1970
to 2008. The bounds tests suggest that the variables of interest are
bound together in the long run when foreign direct investment is
the dependent variable. The associated equilibrium correction is
also signicant, conrming the existence of a long-run relationship.
The results also indicate that there is no signicant Granger
causality from FDI to economic growth, from economic growth to
FDI, from trade to economic growth and from economic growth to
trade in the short run. Even though there is a widespread belief that
FDI can generate positive spillover externalities for the host
country, our empirical results fail to conrm this belief for the
case of Tunisia. They go against the generally accepted idea
considering the positive impact of FDI on economic growth to be
automatic. The results found for Tunisia can be generalized and
compared to other developing countries which share a common
experience in attracting FDI and trade liberalization.
2014 Elsevier B.V. All rights reserved.
JEL classication:
C22
F13
F21
Keywords:
FDI
Trade
Economic growth
ARDL cointegration
Tunisia
* Correspondence to: Faculty of Administrative Sciences, Najran University, Saudi Arabia. Tel.: +966 530948710;
fax: +966 75428887.
E-mail addresses: mounir.balloumi@gmail.com, mrbelloumi@nu.edu.sa.
0939-3625/$ see front matter 2014 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.ecosys.2013.09.002
Please cite this article in press as: Belloumi, M., The relationship between trade, FDI and economic
growth in Tunisia: An application of the autoregressive distributed lag model. Econ. Syst. (2014),
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M. Belloumi / Economic Systems xxx (2014) xxxxxx
1. Introduction
Trade and FDI inows are well known as very important factors in the economic growth process.
Trade plays the role of upgrading skills through the importation and adoption of superior production
technology and innovation. Exporters use innovation and developed production technology either by
acting as subcontractors to foreign enterprises or through international markets competition.
Producers of import-substitutes face competition from foreign rms. They are pushed to adopt more
capital-intensive production facilities to face the hard competition in developing countries, where
products are usually capital intensive (Frankel and Romer, 1999). The impact of trade openness on
economic growth can be positive and signicant mainly due to the accumulation of physical capital
and technological transfer.
Inward FDI can play an important role by increasing and augmenting the supply of funds for
domestic investment in the host country. This can be done through the production chain when foreign
investors buy locally made inputs and sell intermediate inputs to local enterprises. Furthermore,
inward FDI can increase the host countrys export capacity, causing the developing country to increase
its foreign exchange earnings. FDI can also encourage the creation of new jobs, enhance technology
transfer, and boost overall economic growth in host countries. Wang and Blomstrom (1992) and
Gunther (2002) identify four main channels of technological spillovers from foreign to local rms,
namely: imitation, competition, skills (i.e. also labor mobility) and linkage. Imitation is also known as
the learning-by-watching effect. It occurs when a local rm improves its productivity by imitating the
technology used by the multinational rm. The presence of foreign rms creates competition with
local rms. Hence, domestic rms are forced to use the existing resources more efciently and adopt
new technologies (Wang and Blomstrom, 1992; De Mello, 1997, 1999). FDI also causes spillovers
through the transfer of knowledge to the host country. The spillover effect occurs when there is
mobility of well-trained workers and managers from foreign rms to domestic rms (Kaufmann,
1997; Haaker, 1999; Fosfuri et al., 2001; Glass and Saggi, 2002). Generally, FDI spillover arising from
linkages may occur when foreign rms have productivity spillover effects on local rms in the same
industry (horizontal spillovers) or (and) in upstream and downstream industries (vertical spillovers)
by increasing the range and quality of intermediate goods (Borensztein et al., 1998).
The majority of past empirical studies dealt with either trade and FDI interaction on economic
growth (Balasubramanyam et al., 1996; Karbasi et al., 2005) or the relationship between FDI and
economic growth (Lipsey, 2000) or (and) the relationship between trade and economic growth
(Pahlavani et al., 2005). All these studies concluded that both FDI inows and trade promote economic
growth. However, they failed to provide a conclusive result on the relation in general and the direction
of the causality in particular in many developing countries. The growth enhancing effects from FDI
inows and trade vary from country to country and over time. For some countries, FDI and trade can
even affect economic growth negatively (Balasubramanyam et al., 1996; Borensztein et al., 1998;
Lipsey, 2000; De Mello, 1999; Xu, 2000).
Some past studies on this subject suffer from three empirical limitations. The rst is that even
though a large volume of econometric literature dealt with the impacts of FDI on economic growth in
developing countries, there are not enough studies on the question of the causality relationship
between them. The second is that these studies used cointegration techniques based on either the
Engle and Granger (1987) cointegration test or the maximum likelihood test based on Johansen (1988)
and Johansen and Juselius (1990). However, these cointegration techniques may not be appropriate
when the sample size is too small (Odhiambo, 2009). Odhiambo (2009) uses the bounds testing
cointegration approach developed by Pesaran et al. (2001), which is more robust for a small sample.
The third limitation is that by using cross-sectional data some studies do not address country-specic
issues (Casselli et al., 1996; Ghirmay, 2004; Odhiambo, 2009).
The current study investigates the dynamic causal relationship between trade, FDI and economic
growth in Tunisia by implementing the newly developed ARDL-bounds testing approach to
cointegration. Trade and FDI are expressed as a ratio of GDP. The proxy of economic growth is real GDP
per capita. Labor force and capital investments are also considered as control variables in the model.
The Granger procedure is used to test the direction of causality within the Vector Error Correction
Model (VECM). If a set of variables is cointegrated, they must have an error correction representation
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wherein an error correction term (ECT) is incorporated in the model (Engle and Granger, 1987). The
advantage of VECM is the reintroduction of the information lost by differencing time series. This step is
fundamental to investigate the short-run dynamics and the long-run equilibrium.
Despite the abundant literature on FDI, trade and economic growth in many emerging and
developing countries, there is little empirical work on this subject in Tunisia. Previous works studying
the relationship between FDI and economic growth in the Middle East and North Africa (MENA) or
south Mediterranean countries including Tunisia found controversial results. This, in turn, becomes
our main motivation to investigate the relationship between FDI, trade openness and economic
growth in Tunisia using time series techniques. By contrasting the important role of FDI inows, we
can draw some important lessons and guidelines for policymakers in the pursuit of a more effective
scheme to promote economic growth in Tunisia, which is suffering from a high ratio of
unemployment. Since the revolution of 14th January 2014, Tunisia is experiencing a difcult
transition period. What role can FDI and trade play in Tunisia to meet the challenges that the
revolution of 14th January 2011 spawned?
This study can contribute to the existing economic literature, which provides conicting results
concerning this relationship. The study is relevant because the twin policy targets of FDI attraction and
trade liberalization have been an integral preoccupation of Tunisia since the International Monetary
Fund (IMF) Structural Adjustment Program of 1986 and continue to be after the revolution of 14th
January 2011. However, Tunisia has begun to apply new legislations that promote FDI only since 1995,
when it adopted the Barcelona declaration and created the foreign investment promotion agency
(FIPA). Since that date, Tunisia is highlighting the importance of creating an environment to attract
FDI, which could lead to a transfer of technology, create new jobs and increase production and exports.
The study is also relevant because Tunisia is an interesting case study for other south Mediterranean
countries which have applied incentive programs in order to attract FDI.
The rest of the paper is structured as follows. Section 2 presents a theoretical and empirical
literature review. Section 3 gives an overview of Tunisias foreign direct investment and regional trade
agreements. Section 4 describes the used data, while Section 5 deals with the estimation technique
and the empirical analysis of the results. Section 6 concludes the paper.
2. A theoretical and empirical literature review
Theoretically, the effects of FDI on economic growth differ from conventional models in recent
growth models. In neo-classical analysis, FDI does not inuence the long-run growth rate, but only the
level of output. An exogenous increase in FDI would increase the amount of capital and income per
capita temporarily as diminishing returns (on the marginal product of capital) would impose a limit to
this growth in the long run. The impact of FDI on the long-run growth rate can occur only through
technological progress or growth of the labor force, which are both considered exogenous. The seminal
papers of Solow (1956, 1957) formed the basis for many past empirical studies using the neoclassical
model. These studies used the aggregate production function that related the economys output to
capital and labor inputs using macroeconomic series. Investment is integrated as a xed proportion of
output.
Despite the neoclassical model reporting the impact of technological progress on economic growth,
it does not explore the determinants of technological progress. The challenge for the new growth
theory was to explore the determinants and impacts of technological progress. It focused mainly on
incentives that drive innovation, invention, and creation as a main engine of growth (Arrow, 1962;
Shell, 1966; Romer, 1986, 1990; Lucas, 1988; Grossman and Helpman, 1991). The models generally
assumed constant returns to scale to inputs (i.e. capital and labor), the level of technology was
assumed to depend on a set of inputs, and FDI to inuence economic growth via variables such as
research and development and human capital (Romer, 1986; Lucas, 1988). The technology spillovers
from FDI encourage long-run growth, but the extent to which this occurs depends crucially on the
stock of human capital and the absorptive capacity of rms in the host country (Borensztein et al.,
1998).
The main difference between the neoclassical theory and the new growth theory is the technology
function. While the former assumes technological progress to be exogenous, the latter explains
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technological progress as a form of investment spillover arising from different sources, such as
tangible capital, human capital, or research and development expenditures. The main implication of
the endogenous growth theory is that policies which induce international trade, competition, change
and innovation will promote growth. Conversely, policies which have the effect of restricting or
slowing change by protecting or favoring particular existing industries are likely to slow growth over
time.
The empirical literature studying the impacts of FDI and trade on economic growth is very large.
The effect of each of the two variables of FDI and trade on economic growth has generally been studied
for many countries using various sample periods and econometric approaches and methods. The
results of some papers studying the effects of trade (or exports) and FDI on economic growth in
developing countries are promising (Balassa, 1985; Sengupta and Espana, 1994). There is evidence for
the export-led growth hypothesis (ELGH) and the FDI-led growth hypothesis (FLGH). These
hypotheses, which are supported, are based on the idea that the exports and FDI variables are the main
drivers of economic growth.
Ghirmay et al. (2001) studied the relationship between exports and economic growth in nineteen
developing countries using a multivariate causality analysis based on the error correction model. Their
results supported a long-run relationship between the two variables only in twelve of the developing
countries, with the promotion of exports attracting investment and increasing GDP in these countries.
They concluded that the growth process in East Asia is quite different from that in Southeast Asia. By
using a bivariate technique and quarterly data for the period from 1976 to 2003, Mamun and Nath
(2004) found a long-run unidirectional causality from exports to economic growth in Bangladesh.
Narayan et al. (2007) examined the export-led growth hypothesis for Fiji and Papua New Guinea
within a multivariate framework. Their results support the ELGH in the long run for Fiji, while for
Papua New Guinea there is evidence of ELGH in the short run.
Empirical works studying FLGH have found that FDI promotion can greatly benet host countries
through the introduction of new technologies and skills, the creation of new jobs, surging domestic
competition and expanding access to international marketing networks. Boyd and Smith (1992) found
that FDI may affect growth negatively due to misallocation of resources in the presence of some
distortions in pre-existing trade, price and others. Relying on a variety of cross-country regressions for
testing the impact of FDI on per capita GDP, Blomstrom et al. (1994) found that FDI promotes economic
growth when per capita GDP is sufciently high in the host country. Borensztein et al. (1998) studied
the effect of FDI on economic growth in a cross-country regression approach. According to their
ndings, FDI can be an important channel of the transfer of modern technology, but its effectiveness
depends on the stock of human capital in the host country. By estimating a mixed xed and random
effect panel data model that allows for cross-country heterogeneity, Nair-Reichert and Weinhold
(2001) found that the causal relationship between foreign and domestic investment and economic
growth in developing countries is heterogeneous. They justied these results by the homogeneity of
assumptions imposed across countries.
Sadik and Bolbol (2001) studied the impact of FDI on total factor productivity (TFP) in six Arab
countries (Egypt, Jordan, Morocco, Oman, Saudi Arabia and Tunisia) for the period 19781998. They
found a negative and signicant impact of FDI on TFP for the cases of Tunisia, Egypt and Saudi Arabia.
They explained their results with the amount of FDI being insufcient to produce signicant positive
spillover effects and there are some indications that the effect of FDI on TFP has been lower than
domestic investment, indicating a possibly dominating negative crowding-out effect. Bashir (2001)
tested the relation between FDI and GDP per capita in six south Mediterranean countries (Algeria,
Egypt, Jordan, Morocco, Tunisia and Turkey) for the period of 19751990 using an endogenous growth
model. The estimation of a random effect model showed that the impact of FDI on economic growth is
positive but not signicant. The author explained his result by the weakness of FDI inows captured by
these countries during the 1970s and 1980s.
For assessing the impact of FDI ows on economic growth, Carkovic and Levine (2002) constructed
a panel dataset with data averaged over each of the seven 5-year periods between 1960 and 1995 and
used the Generalized Method of Moments (GMM) panel estimator after controlling for the potential
biases induced by endogeneity, country-specic effects, and the omission of initial income as a
regressor. They found that FDI has no impact on economic growth in the long run. Athukorala (2003)
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used the econometric framework of cointegration and an error correction mechanism to capture the
linkages between FDI and GDP in Sri Lanka using time series data from 1959 to 2002. He found that FDI
has a positive effect on GDP and there is a unidirectional causality running from GDP to FDI in Sri
Lanka. Darrat et al. (2005) investigated the impact of FDI on economic growth in Central and Eastern
Europe (CEE) and the MENA regions using a panel dataset to allow for both country and time specic
effects. They found that FDI inows stimulate economic growth in EU accession countries, while the
impact of FDI on economic growth in MENA (including Tunisia) and non-EU accession countries is
either non-existent or negative. The authors explained their ndings by the EU accession countries
strictly and efciently applying requested reforms that contribute to the creation of positive effects of
FDI on economic growth. Meschi (2006) studied the impact of FDI on economic growth in fourteen
MENA countries including Tunisia during the period 19802003 using econometric panel data models.
The author found that the coefcient of FDI is generally negative. She attributed this result to the high
concentration of FDI in the primary sector, mainly the hydrocarbon sector, which produces few
technological externalities. Nicet-Chenaf and Rougier (2009) studied the interactions between FDI and
growth in a set of MENA countries including Tunisia using a panel data model. The authors consider
the MENA countries to be relevant because they generally do not display positive direct effects of FDI
on growth. Their results showed that FDI has no signicant direct effect on economic growth but plays
an indirect role in growth through its positive effects on the formation of human capital and
international integration. They explained these results by the relative weakness of FDI inows in these
countries, which hampers the positive spillover effects of FDI on growth. Tintin (2012) investigated
whether and to what extent FDI spurs economic growth by taking development levels and the quality
of host country institutions into account using a panel data model with xed effects for a sample of
125 countries for the period of 19802010. The author used the economic freedoms index to proxy the
quality of host country institutions. He found that FDI spurs economic growth and development in
developed and developing countries. Nevertheless, the magnitudes of the effects of FDI on economic
growth are non-uniform across country groups. The economic freedoms index had a positive and
signicant effect on economic growth, which implies the importance of high quality institutions for
economic growth and development.
Research examining the impacts of trade openness and FDI on economic growth within the same
model has also delivered ambiguous results. For example, by using cross-section data and OLS
regressions, Balasubramanyam et al. (1996) emphasized trade openness as being crucial for acquiring
the potential growth impact of FDI in developing countries. They found that FDI has a positive effect on
economic growth in host countries which have an export promoting strategy, but not in countries
which have an import substitution strategy. Alici and Ucal (2003) studied the effect of Turkeys
liberalization process on economic growth by investigating a Granger causal relationship between
trade, FDI and economic growth during the period 19872002 on a quarterly basis. They found that
there is evidence of ELGH for Turkey but not FLGH because the spillover effects from FDI to GDP are not
present. Caudros et al. (2004) employed a vector autoregressive model to investigate the causal
relationship between economic growth, inward FDI and trade from the mid-seventies to 1997 in the
Latin American countries (Argentina, Brazil, and Mexico). Their results were the reverse of those of
Alici and Ucal (2003). They conrmed the FLGH, but not the ELGH. Baliamoune-Lutz (2004) found that
the impact of FDI on economic growth is positive and there is a bidirectional relationship between
exports and FDI in Morocco. This result implies that FDI can also promote exports and vice versa. Using
Arellano and Bonds dynamic panel data estimating technique for a panel dataset covering 28 Chinese
provinces over the period 19782000, Yao (2006) found that both exports and FDI have a positive
effect on economic growth. Hisarciklilar et al. (2006) studied the relationship between economic
growth, FDI and trade in some MENA countries for the period 19702003 using the Engle
cointegration and pairwise Granger Causality tests between all the variables. Their results are similar
to those of Darrat et al. (2005), nding no causality between FDI and GDP for most of the
Mediterranean countries including Algeria, Cyprus, Egypt, Israel, Jordan, Morocco, Syria, Tunisia and
Turkey.
Alaya (2006) found that in the case of Morocco, Tunisia and Turkey, economic growth is mainly
determined by exports, domestic investments, and to a lesser extent human capital. The impact of FDI
on economic growth is signicantly negative. The author explained his results with several points.
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First, FDI has the tendency to eliminate domestic investments in these countries. Second, FDI inows
are relatively instable. The volatility of FDI inows is explained by privatization, which becomes one
important source of FDI for these countries in certain years. Also, the volatility is often synonymic with
an absence of reinvestment and weak integration of foreign rms within the host country. Rahman
(2007) re-examined the effects of exports, FDI and expatriates remittances on the real GDP of some
Asian countries (Bangladesh, India, Pakistan and Sri Lanka) using the ARDL technique for cointegration
for the period of 19762006. The ARDL technique conrmed a cointegrating relationship among the
variables in these three countries. The short-run net effects of exports on real GDP in Bangladesh are
more visible than those of FDI. The same applies to India as well, with some minor exceptions for
relatively stronger short-run effects. In the case of Pakistan, FDI was found to exert net restrictive
effects on its real GDP, though these are not highly signicant. For Sri Lanka, FDI had consistently
restrictive effects on real GDP. Alalaya (2010) investigated the relationship between economic growth,
trade and FDI for Jordan for the period of 19902008 by applying the ARDL model for cointegration. He
found a unidirectional causal effect from trade and FDI to economic growth. It was also found that the
speed of adjustment in the model is 0.587, which seems relatively high and signicant. Marc (2011)
studied the effect of FDI on the economies of seven south Mediterranean countries (Algeria, Egypt,
Jordan, Morocco, Syria, Tunisia and Turkey) over the period 19822009 by using a two stage least
squared regression structural model. The author found that human capital and exports are the most
dynamic factors in creating positive spillover effects on economic growth. However, the effect of FDI
on economic growth is signicantly negative. He advanced the same explanation given by Alaya
(2006).
The empirical literature review implies that the impact of FDI on economic growth is conditioned
by some factors. Xu (2000) and Li and Liu (2005) showed that when the technological gap between
foreign and local rms is small, the impact of FDI on growth in the host economy will be signicant.
Some studies provided robust evidence that the education level is crucial to catalyzing FDI effects on
growth because it enables larger technological spillovers obtained from workers mobility (Blomstrom
et al., 1994; Borensztein et al., 1998; Lipsey, 2000; Li and Liu, 2005). It was also shown that trade
openness (Balasubramanyam et al., 1996; OECD, 2002), export diversication (Nicet-Chenaf and
Rougier, 2009), nancial development (Hermes and Lensink, 2003; Alfaro et al., 2004), or a more
efcient and stable legal and institutional environment (Bengoa and Sanchez-Robles, 2003) all favor
the positive effects of FDI on economic growth.
The results of previous studies on the relationship between FDI and economic growth in MENA and
south Mediterranean countries including Tunisia are deceptive, even though the positive effect of FDI
on economic growth is theoretically and empirically proven in many other developed and developing
countries. The image provided by the analyses of the MENA and some south Mediterranean countries
leaves us more perplexed. Most of the analyses concerning those countries agree in explaining the
weak performances in attracting FDI by a too limited international and regional integration in this
zone and by the slowness and ineffectiveness of structural reforms (privatization, improvement of
regulations, the bad quality of institutions, opening and convertibility) to create conditions convenient
for the localization of foreign rms. The sectorial composition of FDI in this region implies an
important presence in the sectors of hydrocarbons (raw energy) and the manufacturing industry
(textile and clothing industry). Also, the objective of foreign investors in these countries remains the
search for cheaper labor. The observed results underline the idea that the effect of FDI depends heavily
on the appropriate characteristics of the host country and the nature of the FDI in question. A more
favorable effect of FDI is connected to the distribution of externalities or spillover effects from
multinationals to local rms. However, such externalities did not take place because of weak links
with local rms or a low absorption capacity (Kumar and Pradhan, 2002).
3. Tunisias foreign direct investment and regional trade agreements
During the last decades, many measures have been adopted by the Tunisian government to attract
FDI inows in the belief that this will introduce modern technologies, enhance productivity, and
stimulate export-led growth. Tunisias structural adjustment plan was set in 1986. It has encouraged
standard scal and monetary policy reforms and a liberalization of the nancial sector. This program
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has characterized the moving forward of Tunisias economic development. A policy of gradual trade
liberalization was pursued, rst by implementing current account convertibility, followed by
accession to the GATT agreements and by a free trade association with the European Union in 1995,
which went into effect on January 1, 2008. The objective of the agreement is to eliminate customs
tariffs and other trade barriers on a wide range of goods and services. However, the most important
aspect of the association agreement may well be that it has served to anchor Tunisias commitment to
reforms.
Tunisia provided a wide range of incentives such as a tax relief up to 35% on reinvested revenues
and prots (30% starting from 2007), exemptions from customs duties and a 10% reduction of value
added tax (VAT) for imported capital goods having no Tunisian manufacturing equivalent, a
suspension of VAT and sales tax on locally produced equipment at company start-up and an optional
depreciation scheduling for capital equipment older than seven years. Additional incentives are
provided to off-shore industries or totally exporting industries such as full exemption on corporate
prots earned on export for the rst ten years and 50% reduction thereafter (granted also to partially
exporting rms), full tax exemption on reinvested prots and income, total exemption from customs
duties on imported capital goods, raw materials, semi nished goods and services necessary for
business (Ghali and Rezgui, 2007).
According to Ghali and Rezgui (2007), net FDI ows to GDP attained 2.2% in 1990. About 80% of FDI
was mainly directed toward the petroleum and gas sector until the rst half of the 1990s. Due to the
privatization program, the share of total FDI in the petroleum and gas sector decreased, attaining 58%
in 1998. There is an FDI shift to the manufacturing sector.
The largest foreign investor in Tunisia is the European Union (EU). Its FDI is mainly concentrated on
the development of the infrastructure network and the textiles and clothing sectors.
Trade openness is important as a vehicle for technological spillovers. In order to benet from trade
openness, Tunisia needs trade partners that are capable of providing it with technology, embodied in
products, machines and equipment of which the country is in short supply. By importing capital
equipment and intermediate products from developed countries that have a larger stock of
knowledge, Tunisia can therefore improve its own stock of knowledge.
Tunisia has been a member of the WTO since March 1995. In order to benet from trade openness,
it signed a Euro-Mediterranean Association Agreement (EMAA) with the European Union in July 1995.
It was the rst country to sign an EMAA with the EU among the South Mediterranean countries which
are engaged in the Barcelona Process. This agreement was ratied and came into force in March 1998.
The main objective of the EMAA is liberalization and facilitation of the exchange of goods, services and
capital. Tunisia already nished the dismantling of tariffs for industrial products in 2008.
The rst trading partner of Tunisia is the EU. Tunisias main exports to the EU are manufactured
products, raw energy and phosphate, and agricultural products. These accounted for about 80% of
exports in 2008 and experienced a growth rate of more than 9% from 2003 to 2008. The main imports
of Tunisia from the EU are machinery and transport equipment, textiles, chemicals and rened energy.
These imports accounted for nearly 65% of Tunisias needs in goods from EU countries and grew at an
estimated average annual rate of 7.2% (Boughzala, 2010).
On the other side, Tunisia has some international trade relations with some Arab countries. Tunisia
signed a bilateral agreement with Libya which came into force in 2002. The Agadir agreement with
Morocco, Egypt and Jordan was signed on 25 February 2004. This committed all partners to removing
substantially all tariffs on trade between them and to harmonizing their legislation with regard to
standards and customs procedures. Even though this agreement came into force in July 2006, its
effective implementation only started in April 2007. Tunisia also signed a free trade agreement with
Turkey in November 2004, replacing the old one, which was signed in 1992, and entering into force in
July 2005.
Tunisias Euro-Med agreement with the EU can increase the openness of the Tunisian economy and
hence FDI inows to Tunisia. The aim of the Mediterranean countries was to create an environment
which attracts FDI and could lead to the transfer of technology and increase production, the creation of
new jobs and exports. This objective is our main motivation to investigate the relationship between
FDI and economic growth in Tunisia. In this study we try to nd out if an FDI shift has benecial effects
for employment, trade, and economic growth in Tunisia.
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8
Table 1
Summary statistics of the variables.
Variables
GDP per capita
Labor
FDI
Trade
GFCF
Mean
Median
Maximum
Minimum
Std. dev.
Observations
1426.885
1288.830
2413.840
730.120
427.93
39
2,764,921
2,788,834
3,958,371
1,536,049
738,625.8
39
2.327
1.825
9.562
0.600
1.741
39
82.450
85.838
125.146
46.744
17.192
39
2.96E+09
2.79E+09
5.30E+09
9.45E+08
1.19E+09
39
4. Data sources and description of variables

Annual time series data on economic growth, FDI, trade, labor and capital stock covering the 1970
2008 period have been used in this study. The data have been obtained from different sources,
including Tunisia Central Bank annual reports, quarterly bulletins, etc. In addition, different volumes
of the International Financial Statistics (IFS) Yearbook published by the International Monetary Fund
and the 2009 edition of the World Development Indicators (WDI) published online by the World Bank
have been used to supplement the local data. The data corresponding to labor and FDI are sourced
from Tunisia Central Bank annual reports, quarterly bulletins and volumes of the IFS Yearbook. The
rest of the variables are sourced from WDI.
Economic growth is measured by the increase of real GDP per capita in each successive time period.
The variable real GDP per capita is noted by Y. It is expressed in constant 2000 Tunisian dinar (TND).
FDI is the value of real gross foreign direct investment inows to GDP ratio. Foreign direct investment
is the net inows of investment to acquire a lasting management interest in an enterprise operating in
an economy other than that of the investor.1 Trade openness (T) is the total sum of exports and imports
divided by GDP; L is measured as the volume of the total labor force; capital investment (K) is
measured by the real value of gross xed capital formation (GFCF constant 2000 TND).2 The summary
statistics of all variables are given in Table 1.
5. Econometric methodology and empirical results

The empirical study is based on the new theory of endogenous growth initially developed by Arrow
(1962) and Shell (1966) and later extended by Romer (1986, 1990), Lucas (1988), and Grossman and
Helpman (1991). To study the relationship between FDI, trade and economic growth in an open
economy, the starting point is the famous standard model of growth where real GDP is explained by
total factor productivity (TFP), labor force and the stock of capital (Solow, 1956, 1957). In the
neoclassical growth model, technology and labor are exogenous; FDI inows increase the investment
rate and lead to an increase in per capita GDP in the short run, but have no growth effect in the long
run. Zebregs (1998) tested alternative versions of the neoclassical model with country-specic
technologies and concluded that for understanding the distribution of FDI ows across developing
countries, the standard neoclassical model, either with or without exogenous differences in
technologies across countries, is not very helpful. According to the new theory of endogenous growth,
TFP is determined in an endogenous way by economic factors. Technological progress and FDI have
been considered to have a permanent growth effect in the host country through technology transfer
and spillover effects. According to the literature on the relationship between FDI and economic growth
(see De Mello, 1997; Borensztein et al., 1998), FDI may stimulate knowledge transfers, both in terms of
labor training and skill acquisition and by introducing alternative management practices and better
1
Generally, foreign direct investment includes mergers and acquisitions, building new facilities, reinvesting prots earned
from overseas operations and intracompany loans.
2
Gross xed capital formation includes land improvements (fences, ditches, drains, etc.); plant, machinery, and equipment
purchases; and the construction of roads, railways, and the like, including schools, ofces, hospitals, private residential
dwellings, and commercial and industrial buildings (denition of the World Bank).
G Models
Table 2
ADF and DF-GLS unit root tests on log levels of variables.
Variables
ln(Y)
ln(K)
ln(L)
ln(F)
ln(T)
a
b
ADF test
DFGLS test
PP test
SIC lag
t-Stat
Critical value
at 5%
SIC lag
t-Stat
Critical value
at 5%
t-Stat
Critical value
at 5%
0
1
0
0
1
2.40b
3.14b
2.18a
2.79a
3.17b
3.53
3.53
2.94
2.94
3.53
0
1
0
0
1
1.75b
2.52b
0.92b
2.73a
2.58b
3.19
3.19
3.19
1.95
3.19
2.55b
2.01a
2.20a
2.76a
2.53b
3.53
2.94
2.94
2.94
3.53
Model without trend.

Model with constant and trend.
organizational arrangements. Trade openness promotes economic growth; exports can increase
productivity and alleviate the countrys foreign exchange constraints; imports can provide the country
with advanced technology. Trade openness is also crucial for acquiring the potential growth impact of
FDI (Balasubramanyam et al., 1996). Also, economic growth has effects on trade and FDI. FDI can
increase the capital stock and employment in the host country. Labor and capital are introduced in the
model to control for additional determinants of economic growth in order to reduce the problem of
omitted variable bias.
5.1. Unit roots tests
In time series analysis, before running the causality test the variables must be tested for
stationarity. For this purpose, in this current study we use the conventional ADF tests, the Phillips
Perron test following Phillips and Perron (1988) and the DickeyFuller generalized least square (DFGLS) de-trending test proposed by Elliot et al. (1996).3
The ARDL bounds test is based on the assumption that the variables are I(0) or I(1). Therefore,
before applying this test, we determine the order of integration of all variables using unit root tests.
The objective is to ensure that the variables are not I(2) so as to avoid spurious results. In the presence
of variables integrated of order two we cannot interpret the values of F statistics provided by Pesaran
et al. (2001).
The results of the stationarity tests show that all variables are nonstationary at level. The results are
given in Table 2. The ADF, PhillipsPerron and DF-GLS tests applied to the rst difference of the data
series reject the null hypothesis of nonstationarity for all variables used in this study (Table 3). It is
therefore worth concluding that all the variables are integrated of order one.
5.2. ARDL bounds tests for cointegration
In order to empirically analyze the long-run relationships and short-run dynamic interactions
among the variables of interest (trade, FDI, labor, capital investment and economic growth), we apply
the autoregressive distributed lag (ARDL) cointegration technique as a general vector autoregressive
(VAR) model of order p in Zt, where Zt is a column vector composed of the ve variables:
Zt = (Yt Kt Lt Ft Tt)0 . The ARDL cointegration approach was developed by Pesaran and Shin (1999) and
Pesaran et al. (2001). It has three advantages in comparison with other previous and traditional
cointegration methods. The rst is that the ARDL does not need all the variables under study to be
integrated of the same order and can be applied when the underlying variables are integrated of order
3
It is possible to test for structural breaks in time series, but in this study the period is not very large to allow for structural
breaks. Also, the development of testing for unit roots with structural breaks raises two questions. First, testing for structural
breaks when the series is otherwise non-stationary will affect whether there is evidence of a structural break. Second, it is
difcult to incorporate breaks of each time series into the cointegration framework (Glynn et al., 2007).
G Models
10
Table 3
ADF and DF-GLS unit root tests on rst differences of log levels of variables.c
Variables
ln(Y)
ln(K)
ln(L)
ln(F)
ln(T)
ADF test
DFGLS
PP test
SIC lag
t-Stat
Critical value
at 5%
SIC lag
t-Stat
Critical value
at 5%
t-Stat
Critical value
at 5%
0
0
0
0
0
6.21b
3.73b
5.58b
7.82a
4.87b
2.94
2.94
2.94
1.95
2.94
1
0
0
0
0
3.07b
3.62b
5.62b
7.66b
4.89b
1.95
1.95
1.95
1.95
1.95
6.26b
3.24a
5.59b
10.80a
4.47a
2.94
1.95
2.94
1.95
1.95
Model without constant and trend.

Model without trend.
c
The testing procedure for the different unit root tests is applied to the equation without constant and trend, equation without trend and
equation with constant and trend. We begin by estimating the last equation, and if we nd that the trend is not signicant, we estimate
the equation without trend. If the constant is not signicant we estimate the equation without constant and trend to test for the existence
of a unit root. The test regression, which includes a constant and deterministic time trend, captures the deterministic trend under the
alternative. This formulation is appropriate for trending time series like macroeconomic variables.
b
one, order zero or fractionally integrated. The second advantage is that the ARDL test is relatively more
efcient in the case of small and nite sample data sizes. The third and last advantage is that by
applying the ARDL technique we obtain unbiased estimates of the long-run model (Harris and Sollis,
2003). The ARDL model used in this study is expressed as follows:
DlnY t a01 b11 lnY t1 b21 lnK t1 b31 lnLt1 b41 lnF t1 b51 lnT t1
p
q
q
q
X
X
X
X
a1i DlnY ti
a2i DlnK ti
a3i DlnLti
a4i DlnF ti
i1
i1
i1
i1
q
X
a5i DlnT ti e1t
(1)
i1
DlnK t a02 b12 lnY t1 b22 lnK t1 b32 lnLt1 b42 lnF t1 b52 lnT t1
p
q
q
q
X
X
X
X
a1i DlnK ti
a2i DlnY ti
a3i DlnLti
a4i DlnF ti
i1
i1
i1
i1
q
X
a5i DlnT ti e2t
(2)
i1
DlnLt a03 b13 lnY t1 b23 lnK t1 b33 lnLt1 b43 lnF t1 b53 lnT t1
p
q
q
q
X
X
X
X
a1i DlnLti
a2i DlnK ti
a3i DlnY ti
a4i DlnF ti
i1
i1
i1
i1
q
X
a5i DlnT ti e3t 3
(3)
i1
DlnF t a04 b14 lnY t1 b24 lnK t1 b34 lnLt1 b44 lnF t1 b54 lnT t1
p
q
q
q
X
X
X
X
a1i DlnF ti
a2i DlnK ti
a3i DlnLti
a4i DlnY ti
i1
i1
q
X
a5i DlnT ti e4t 4
i1
i1
(4)
i1
G Models
11
DlnT t a0 b15 lnY t1 b25 lnK t1 b35 lnLt1 b45 lnF t1 b55 lnT t1
p
q
q
q
X
X
X
X
a1i DlnT ti
a2i DlnK ti
a3i DlnLti
a4i DlnF ti
i1
i1
i1
i1
q
X
a5i DlnY ti e5t
(5)
i1
where all variables are as previously dened in Section 4, ln(.) is the logarithm operator, D is the rst
difference, and et are the error terms.
The bounds test is mainly based on the joint F-statistic whose asymptotic distribution is nonstandard under the null hypothesis of no cointegration. The rst step in the ARDL bounds approach is
to estimate the ve equations ((1)(5)) by ordinary least squares (OLS). The estimation of the ve
equations tests for the existence of a long-run relationship among the variables by conducting an Ftest for the joint signicance of the coefcients of the lagged levels of the variables, i.e.: H0:
b1i = b2i = b3i = b4i = b5i = 0 against the alternative one: H1: b1i 6 b2i 6 b3i 6 b4i 6 b5i 6 0 for i = 1, 2, 3, 4, 5. We
denote the F-statistic of the test which normalizes on Y by FY (Y\K, L, F, T). Two sets of critical values for
a given signicance level can be determined (Pesaran et al., 2001). The rst level is calculated on the
assumption that all variables included in the ARDL model are integrated of order zero, while the
second one is calculated on the assumption that the variables are integrated of order one. The null
hypothesis of no cointegration is rejected when the value of the test statistic exceeds the upper critical
bounds value, while it is not rejected if the F-statistic is lower than the lower bounds value. Otherwise,
the cointegration test is inconclusive.
The use of this approach is guided by the short data span. We choose a maximum lag order of 2 for
the conditional ARDL vector error correction model by using the Akaike information criteria (AIC). The
calculated F-statistics are reported in Table 4 when each variable is considered as a dependent variable
(normalized) in the ARDL-OLS regressions. Their values are: for Eq. (1), FY (Y\L, K, F, T) = 1.992; for
Eq. (2), FL (L\Y, K, F, T) = 0.762; for Eq. (3), FT (T\Y, K, F, L) = 2.736; for Eq. (4), FK (K\Y, L, F, T) = 2.552; and for
Eq. (5), FF (F\Y, K, L, T) = 6.701. From these results, it is clear that there is a long-run relationship
amongst the variables when FDI is the dependent variable because its F-statistic (6.701) is higher than
the upper-bound critical value (4.15) at the 5% level. This implies that the null hypothesis of no
cointegration among the variables in Eq. (5) is rejected. However, for the other Eqs. (1)(4), the null
hypothesis of no cointegration is not rejected.
5.3. Granger short-run and long-run causality tests
Once cointegration is established, the conditional ARDL (p, q1, q2, q3, q4) long-run model for ln(Ft)
can be estimated as:
lnF t a0
q1
q2
q3
q4
p
X
X
X
X
X
a1i lnF ti
a2i lnK ti
a3i lnLti
a4i lnY ti
a5i lnT ti et
i1
i0
i0
i0
i0
(6)
Table 4
Results from bound tests.
Dependant variable
AIC lags
F-statistic
Decision
FF (F\Y, K, L, T)
FY (Y\L, K, F, T)
FL (L\Y, K, F, T)
FT (T\Y, K, F, L)
FK (K\Y, L, F, T)
Lower-bound critical value at 1%
Upper-bound critical value at 1%
2
2
1
1
1
3.06
4.15
6.701
2.365
0.762
2.736
2.552
Cointegration
No cointegration
No cointegration
No cointegration
No cointegration
Lower and upper-bound critical values are taken from Pesaran et al. (2001), Table CI(ii) Case II.
G Models
12
Table 5
Estimated long-run coefcients using the ARDL approach.
Variable
Coefcient
t-Statistic
Probability
C
ln(Y)
ln(L)
ln(K)
ln(T)
R-squared
F-statistic
DW-statistic
14.57
0.93
1.82
1.87
1.17
0.48
7.78
1.81
1.44
0.89
2.45
2.50
1.26
0.15
0.37
0.01
0.01
0.21
0.0001
where all variables are as previously dened. The orders of the ARDL (p, q1, q2, q3, q4) model in the ve
variables are selected by using AIC. Eq. (6) is estimated using the following ARDL (1, 0, 0, 0, 0)
specication. The results obtained by normalizing FDI in the long run are reported in Table 5.
The estimated coefcients of the long-run relationship are signicant for capital investment
and labor but not signicant for trade openness and output per capita. Capital investment has a
positive signicant impact on FDI at the 5% level. The labor force variable is negatively signed and
signicant at the 5% level. This is indicative of the growing unemployment problem and low
productivity of labor in Tunisia, which discourage the inow of FDI. The high level of
unemployment in Tunisia, which is associated with non-qualied workers characterized by
low productivity, does not encourage foreign investors to enter. Considering the impacts of trade
openness and output per capita, the two variables are insignicant at the 5% level. The degree of
openness to exterior does not stimulate FDI inow, which creates new business projects that may
lead to economic growth.
Following Odhiambo (2009) and Narayan and Smyth (2008), we obtain the short-run dynamic
parameters by estimating an error correction model associated with the long-run estimates. The longrun relationship between the variables indicates that there is Granger-causality in at least one
direction which is determined by the F-statistic and the lagged error-correction term. The short-run
causal effect is represented by the F-statistic on the explanatory variables while the t-Statistic on the
coefcient of the lagged error-correction term represents the long-run causal relationship (Odhiambo,
2009; Narayan and Smyth, 2006). The equation, where the null hypothesis of no cointegration is
rejected, is estimated with an error-correction term (Narayan and Smyth, 2006; Morley, 2006).
The vector error correction model is specied as follows:
DlnF t a0
q
q
q
P
X
X
X
X
a1i DlnF ti
a2i DlnK ti
a3i DlnLti
a4i DlnY ti
i1
i1
i1
q
X
a5i DlnT ti aECT t1 et
i1
(7)
i1
DlnY t a0
q
q
P
X
X
X
a1i DlnY ti
a2i DlnK ti
a3i DlnLti
i1
i1
i1
q
q
X
X
a4i DlnF ti
a5i DlnT ti et
i1
DlnK t a0
(8)
i1
q
q
P
X
X
X
a1i DlnK ti
a2i DlnY ti
a3i DlnLti
i1
i1
q
q
X
X
a4i DlnF ti

a5i DlnT ti et
i1
i1
(9)
i1
G Models
DlnLt a0
13
q
q
P
X
X
X
a1i DlnY ti
a2i DlnLti
a3i DlnK ti
i1
i1
i1
q
q
X
X
a4i DlnF ti
a5i DlnT ti et
i1
DlnT t a0
(10)
i1
q
q
P
X
X
X
a1i DlnT ti
a2i DlnK ti
a3i DlnLti
i1
i1
i1
q
q
X
X
a4i DlnF ti
a5i DlnY ti et
i1
(11)
i1
where a1i, a2i, a3i, a4i and a5i are the short-run dynamic coefcients of the models convergence to
equilibrium and a is the speed of adjustment.
Eqs. (7)(11) are estimated separately by OLS regression. The results of the short-run dynamic
coefcients associated with the long-run relationships obtained from Eq. (7) are given in Table 6. The
regression for the underlying ARDL Eq. (7) ts very well and the model is globally signicant at the 1%
level. It also passes all diagnostic tests against serial correlation (Durbin Watson test and Breusch
Godfrey test), heteroskedasticity (White heteroskedasticity test), and normality of errors (JarqueBera
test). The Ramsey RESET test also suggests that the model is well specied. All results of these tests are
shown in Table 7.
The stability of the long-run coefcient is tested by the short-run dynamics. Once the ECM model
given by Eq. (7) has been estimated, the cumulative sum of recursive residuals (CUSUM) and the
CUSUM of square (CUSUMSQ) tests are applied to assess parameter stability (Pesaran and Pesaran,
1997). Figs. 1 and 2 plot the results for CUSUM and CUSUMSQ tests. The results indicate the absence of
any instability of the coefcients because the plot of the CUSUM and CUSUMSQ statistic fall inside the
critical bands of the 5% condence interval of parameter stability.
The Chow breakpoint and Chow forecast tests are used to examine the signicant structural break
in the data in 1995 and over the post-Barcelona period of 19952008. The pre-Barcelona period is
19701995. We choose 1995 as a breakpoint because in July 1995, Tunisia signed an association
agreement with the EU among the South Mediterranean countries engaged in the Barcelona Process.
The F-statistics and Log likelihood ratios do not indicate any structural break (see Table 8).
Table 6
Results of Eq. (7), ARDL (1, 0, 0, 0, 0) selected based on AIC.
Variable
Coefcient
t-Statistic
Probability
C
D(ln(Y))
D(ln(T))
D(ln(L))
D(ln(K))
ECT(1)
R-squared
F-statistic
DW-statistic
0.05
0.14
1.47
0.92
2.60
0.69
0.43
4.98
1.98
0.48
0.05
1.31
0.41
2.32
4.09
0.63
0.95
0.19
0.68
0.02
0.0003
0.001
Table 7
Results of diagnostic tests.
BreuschGodfrey serial correlation test

White Heteroskedasticity test
JarqueBera test
Ramsey RESET test (log likelihood ratio)
x2 statistic
Probability
0.04
7.86
1.06
15.49
0.82
0.64
0.58
0.11
G Models
[(Fig._1)TD$IG]
14
20
15
10
5
0
-5
-10
-15
-20
1980
1985
1990
CUSUM
1995
2000
2005
5% Significance
Fig. 1. Plot of CUSUM test for Eq. (7).
[(Fig._2)TD$IG]
1.6
1.2
0.8
0.4
0.0
-0.4
1980
1985
1990
CUSUM of Squares
1995
2000
2005
5% Significance
Fig. 2. Plot of CUSUMSQ test for Eq. (7).
Beginning with the results for the long run, the coefcient of the lagged error-correction term is
signicant at the 1% level with the expected sign, which conrms the result of the bounds test for
cointegration. Its value is estimated at 0.69, which implies that the speed of adjustment to
equilibrium after a shock is high. Approximately 69% of disequilibria from the previous years shock
converge back to the long-run equilibrium in the current year. In the long run, real GDP per capita,
labor, capital investment and trade openness Granger cause FDI. This result implies that causality runs
interactively through the error-correction term from real GDP per capita, labor, capital and trade
G Models
15
Table 8
Statistical output for stability tests.
Chow forecast test

Chow breakpoint test
Forecast period,
breakpoint
F-statistic
Probability
of F-statistic
Log likelihood
ratio
Probability of Log
likelihood ratio
19952008
1995
0.87
0.76
0.59
0.60
19.68
6.20
0.14
0.40
Table 9
Results of short-run Granger causality.
Dependent variable
D(ln(Y))
D(ln(T))
D(ln(L))
D(ln(K))
D(ln(F))
*
**
F statistics
Direction of causality
D(ln(Y))
D(ln(T))
D(ln(L))
D(ln(K))
D(ln(F))
0.40
0.39
4.99*
0.002
0.36
0.67
5.19*
1.72
1.05
0.98
0.19
0.16
3.89*
4.76*
0.009
5.39*
1.88
2.81**
0.92
0.90
K!Y
K ! T; F ! T
Y ! K; T ! K
K!F
Statistical signicance at 5% level.

Statistical signicance at 10% level.
openness to FDI. In the short run, only capital investment is signicant at the 5% level and has an
important impact on FDI. The variables of economic growth, trade and labor are not signicant.
The results of the short-run Granger causality tests are shown in Table 9. In the short run, the
F-statistics on the explanatory variables suggest that at the 10% level or better there is bi-directional
Granger causality between capital investment and economic growth and between capital investment
and trade, unidirectional Granger causality running from capital investment to FDI and from FDI to
trade. There is no Granger causality from trade to FDI. Hisarciklilar et al. (2006) found that there is no
Granger causality from FDI to trade or from trade to FDI for Tunisia. The Granger causality test results
for the relationship between FDI and real GDP per capita are interesting and indicate that there is no
signicant Granger causality from FDI to GDP or from GDP to FDI. This is consistent with the results of
Hisarciklilar et al. (2006). Turning to the Granger causality test results for real GDP per capita and trade
openness, there is also no signicant Granger causality from trade to real GDP per capita or from real
GDP per capita to trade. These results imply that FDI and trade have mostly been import-substituting.
Hisarciklilar et al. (2006) found that the direction of causality is from economic growth to trade in
some south Mediterranean countries. We also nd that FDI does not Granger cause domestic
investment in Tunisia. Hence, an indirect impact on economic growth is absent. This can be explained
by the absence of signicant crowding-in effects generated by the settlement of foreign rms in
Tunisia. This argument is indeed valid for Tunisia, where local rms may be weak in responding
competitively to multinational rms. Also, linkages between multinational and local rms are subject
to time and the skill level of domestic investors. While it is agreed that multinational rms generate
positive spillovers via the labor mobility channel, it can be argued that instead of training local
workers, multinational rms may skim the domestic market of well-trained workers and free-ride on
previous training provided by domestic rms. We can conclude that domestic investment promotes
trade, FDI and economic growth in the short run, and is the main driver of economic growth in Tunisia.
The absence of causality from FDI to economic growth conrms previous ndings which stated that
foreign investors tend to eliminate domestic rms. This could be explained by the wave of
privatizations and the mergers and acquisitions which have taken place in Tunisia in the 1990s and
2000s. Indeed, since the 1990s, FDI nances less and less the establishment of new activities but rather
the acquisition of existing companies, in particular government corporations or licenses of
exploitation telephony (Alaya, 2006). According to CNUCED (2005), mergers and acquisitions
represented about 16.8% of FDI inows in Tunisia during the period 19962003, while privatizations
of public companies (mainly in telecommunications and cement) represented about 30% during the
period 19962000. By studying foreign direct investment and international subcontracting in Tunisia,
Rahmouni (2012) showed that the best performances by foreign direct investments during the last
G Models
16
Table 10
Investment distribution by sectors (in Million TND).
Sectors
Years
2006
Manufacturing industries
Energy
Tourism and real estate
Agriculture
Services and others
Total FDI
347.4
940.3
18.3
14.1
3082.8
4402.9
2007
(7.89%)
(21.35%)
(0.42%)
(0.32%)
(70.02%)a
485.7
1359.0
72.0
7.7
146.4
2070.8
2008
(23.45%)
(65.63%)
(3.48%)
(0.37%)
(7.07%)
641.6
1933.9
198.6
20.1
604.5
3398.7
(18.88%)
(56.90%)
(5.84%)
(0.59%)
(17.79%)
Source: Report on FDI in Tunisia, December 2012.

a
Of which the privatization of Tunisia telecom represents 96.4%, i.e. 2972 million TND.
twenty years are almost completely understandable by important privatization operations for 1998
and 2000 in the industry branch, and 2003 and 2006 in the telecommunications branch. Furthermore,
these operations did not activate dynamics of entry of FDI to these sectors. FDI inows also remained
very dependent on activities of exploration and production of hydrocarbons (UNCTAD, 1999).
Table 10 shows that foreign direct investment, except in energy and privatizations, is weak. It gives
an idea about the distribution of FDI inows by sectors in Tunisia during the years 2006, 2007 and
2008.4 Finally, the process of economic liberalization and integration undertaken by Tunisia since the
1990s did not favor the regular entry of FDI ows. By reviewing an important number of interesting
studies on the role of foreign direct investment in stimulating economic growth, both de Mello (1997)
and the OECD (2002) conclude that the way in which FDI affects growth is likely to depend on the
economic and technological conditions in the host country. In particular, it appears that Tunisia has to
reach a certain level of development in technology, education and infrastructure before it will be able
to capture the potential benets associated with FDI. Hence, FDI seems to have a more limited growth
impact in technologically less advanced countries such as Tunisia.
6. Conclusion
This paper examines the dynamic causal relationship among the series of economic growth, foreign
direct investment, trade openness, labor, and capital investment in Tunisia for the period of 1970
2008. It implements an ARDL model to cointegration to investigate the existence of a long-run
relationship among the above noted series, and the Granger causality within VECM to test the
direction of causality between the variables. The topic merits special attention due to the possible
interrelations among the series with implications for economic growth. The results show that there is
cointegration among the variables specied in the model when FDI is the dependent variable. Trade
openness and economic growth promote foreign direct investment in Tunisia in the long run. The
results indicate that there is no signicant Granger causality from FDI to economic growth or from
economic growth to FDI in the short run. Turning to the Granger causality test results for economic
growth and trade openness, there is also no signicant Granger causality from trade to economic
growth or from economic growth to trade in the short run.
Even though there is a widespread belief that FDI can generate positive productivity externalities
for the host country, our empirical results fail to conrm this. Domestic capital investment is the main
driver of economic growth in Tunisia. These results can generate important implications and
recommendations for policymakers in Tunisia. They suggest that for FDI to have the anticipated
positive impact on economic growth, Tunisia will have to undertake serious reforms with clear
objectives and strong commitments. It has to improve its attraction of FDI through a series of more
ambitious structural policies (regional integration such as activating the Arab Maghreb Union,5
4
These data are lacking before 2006.

The Arab Maghreb Union is a trade agreement aiming for an economic and future political unity among Arab countries of the
Maghreb in North Africa (Algeria, Libya, Mauritania, Morocco and Tunisia). The union is inactive and frozen due to deep political
and economic disagreements between Morocco and Algeria regarding, among others, the issue of Western Sahara.
5
G Models
17
reforming its educational and nancial system, and developing its infrastructure). The point is that
these reforms also contribute to the creation of an environment that is more favorable to spillover
effects since they improve the social returns to domestic and foreign investments.
The results of this paper could be very interesting for many developing countries to learn the lesson
that the attraction of FDI is important to promote economic growth, but not sufcient. One may
wonder about the effectiveness of FDI to promote economic growth, which depends on the level of FDI,
its nature, the sectors of investment, etc. Sector-based analysis using disaggregated data according to
the type of FDI could shed more light on this question. Unfortunately, the major handicap here is the
availability of data, which are still lacking.
Acknowledgments
The author thanks AGRODEP (IFPRI) and WTO for their sponsorship to present the paper in the 15th
Annual Conference on Global Economic Analysis New Challenges for Global Trade and Sustainable
Development organized by the Center for Global Trade Analysis (Purdue University), World Trade
Organization and International Trade Centre, June 2729, 2012, Geneva, Switzerland. Thanks go also
to Antoine Bouet, Betina Dimaranan and Mustapha Sadni Jallab for their valuable comments and
suggestions. Gratitude goes to the anonymous reviewers on earlier drafts of the manuscript.
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