A Foreign Direct Investment and Economic Growth: A Theoretical Reassessment with Empirical Illustrations from MENA Economies

This paper examines the relationship between foreign direct investment and balanced growth within the classical Keynesian synthesis framework. As foreign capital has become increasingly important for developing economies, understanding how FDI contributes to long-term growth is both a theoretical and policy concern. This study seeks to explain that relationship by extending the classical-Keynesian growth model to include FDI as a complementary component of domestic capital, while also distinguishing between physical and human capital accumulation. The model is built around an augmented production function in which foreign capital is linked proportionally to domestic capital, allowing us to derive new steady-state expressions for capital intensity and income per worker. To support the theoretical analysis, an empirical extension is conducted using data from Algeria, Egypt, Tunisia, and Iran over the period 2010–2023, based on UNCTAD statistics on capital coefficients and foreign participation rates. The results show that the average capital-output ratio for the sample is 4.65, and that higher foreign participation improves investment performance only when domestic savings and human capital are sufficiently strong. The findings reveal a new adjustment mechanism in which FDI supports growth through capital accumulation and productivity gains, but these effects remain conditional on domestic absorptive capacity. In the absence of human capital development and technological readiness, foreign investment may generate weak spillovers and even substitute capital for labour. This suggests that attracting FDI alone is not enough; it must be supported by policies that strengthen education, institutional quality, and innovation capacity. The model therefore provides a semi-endogenous explanation of how foreign capital can contribute to sustainable growth when it is embedded within broader national development strategies.