Abstract Despite decades of foreign direct investment promotion and export diversification initiatives, productivity growth in the Middle East and North Africa has remained disappointing. We study the joint dynamics of total factor productivity, foreign direct investment, and export diversification in MENA economies over 1995–2021, combining panel vector autoregression with country-level local projections. Three results emerge: foreign direct investment modestly increases export diversification but generates little evidence of productivity spillovers; productivity innovations remain self-driven. Diversification shocks are followed by short-run efficiency losses, consistent with adjustment costs and reallocation toward lower-productivity activities before learning occurs. These average effects conceal marked heterogeneity: oil exporters exhibit weak cross-variable transmission consistent with enclave structures, whereas non-oil economies display more active but fragile interactions that dissipate over time. State-dependent analysis further reveals that transmission mechanisms weaken noticeably during the Arab Spring period, with the affected economies exhibiting a near-complete breakdown in cross-variable dynamics. By modeling productivity, investment, and diversification as an endogenous system, we show that regional averages mask fundamentally different transmission mechanisms. The findings suggest that foreign direct investment and diversification strategies require complementary reforms strengthening absorptive capacity and domestic linkages to translate external inflows into durable productivity gains.
Eldarassi et al. (Thu,) studied this question.