Threshold Effect of Foreign Direct Investment on Economic Growth: New Evidence From a Panel Regime Switching Models

Abstract The article contributes to the existing literature by examining the non-linear effect of foreign direct investment (FDI) on the development of the Arab Maghreb Union (AMU) countries during the period 1980-2019. These countries multiply their FDI attraction policies in order to enrich the national externalities offered to local businesses and benefit from some positive effects on their economy in terms of growth, technology, know-how, etc. Using Panel Smooth Transition Regression Model (PSTR) and Panel Smooth Transition Autoregressive Model (PSTAR) models, our findings reveal that the FDI shows opposite effects below and over the estimated threshold. This highlights the asymmetrical effect of unforeseen shocks on its volatility. Policy implications are also discussed.JEL Classification: C51; C53; F21; F21; F34; O16; O23; R11.