93 Sabra, Journal of International and Global Economic Studies, 8(1), June 2015, 93-112 A Dynamic Panel Analysis of French Exports and Outward FDI in Selected Mediterranean Countries Mahmoud M. Sabra 1 Al-Azhar University, Gaza, Palestine Abstract: This article investigates the relationship between exports and FDI in the Mediterranean area using gravity analysis. Due to the controversial literature, the theory strongly supports the substitutional hypothesis, meanwhile, the complementary case supported empirically, others doubt that the later relationship is spurious statistical complementarity relationship. Discovering the relationship nature reflects essentially on the local and foreign macroeconomic indicators and hence the policy making. Therefore, we examine this hypothesis by using the most recent static and dynamic panel data analysis, which are H-T model, FEVD and DPD system. This application of dynamic method in the subject can avoid several econometric problems that faced researches before. We formulate an original model of two dynamic gravity equations intersected transversely to detect the relationship between the variables. The dynamic analysis shows a clear-cut substitution significant relationship between the variables. The other determinants show a significant importance of explaining both indicators. Keywords: Outward FDI; Exports, Panel data analysis, France and MENA countries JEL classification: F14, F21, C33 1. Introduction In home country, export is in the focus of economic researches and decision makers due to its multiple positive contributions to improve the macroeconomic indicators. In addition, it contributes to achieve the macroeconomic stability and alleviating the macroeconomic problems, such as unemployment, trade deficit, accelerating economic growth and increasing the international competitiveness of the local economy. Similarly, firms’ internationalization and increasing outward FDI improve the access for the external resources and markets, for which increases the foreign affiliates’ employment and financial transfers to the local economy. On the other hand, attracting FDI and reducing imports are in focus of decision makers in the host countries. In fact, inward FDI augmentation increase local production and improve the macroeconomic indicators, such as unemployment. Hence, formulating polices that attract FDI may also target reduce imports from FDI home country. Therefore, the nature of the relationship of the two variables is very essential for policy making, whereas in the home country, the substitutional relationship should decrease the output and raising the unemployment in the long run, in case of FDI increasing. In contrast, the complementary relationship would stabilize the local economy and improving employment, growth, the foreign economic presence and competitiveness, and in turn boosting a positive relationship with each other, and vice versa in the host country. The relationship between FDI and exports is complex since there are several aspects that must be taken into account. In addition, controversial literature discussion about the nature of the relationship exists; where the theory strongly supports the substitutional hypothesis, meanwhile, the complementary case supported by many empirical researches, others doubt that the later relationship is spurious statistical complementarity relationship, Head and Ries (2004).