A Dynamic Model for determining Inward Foreign ... - Business School

More documents

Recommendations

Info

2.2.4 Gross Domestic Product GDP is the market value of all final goods and services produced within an economy in a given period of time. Several studies have shown that the importance of GDP in attracting FDI. For example, Bitzenis et al highlights that the economic variables such as GDP is considered as first order in determining FDI (2007, 693; Caves, 2007; Dunning and Lundan, 2008). In addition, Asiedu points out that the size of a country’s market as measured by GDP is a key determinant of FDI inflows (2006, 73). Blonigen et al conduct a general examination of spatial interaction in empirical FDI models using data on US outbound FDI activity. As a result, they state that the traditional determinant of FDI such a host country’s GDP has a strong positive and significant coefficient FDI (2007, 1314). Consequently, based on this overview of the related literature, the hypothesis has been formulated as follows: H 5a : There is a positive relationship between Gross Domestic Product and inward foreign direct investment. 2.2.5 Inflation The inflation rate means that the general level of price for goods and services is rising and subsequently purchasing power is falling. The Inflation rate is frequently used as an indicator of macroeconomic instability reflecting the presence of internal economic tension of the inability or unwillingness of government. Therefore, Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum (Mankiw 2007, 76-85). Rammal and Zurbruegg examine the determinants of FDI for five Asian economies namely: Indonesia, Malaysia, Philippines, Singapore and Thailand, by using a panel data set containing information on FDI flows from home to host countries. As a result, the negative relationship shows that an increase in the inflation rate lessens FDI in that country (2006, 409). However, Trevino et al investigate the process of institutionalization and legitimization in countries in Latin America and its impact on organizational decision-making regarding inward foreign direct investment (FDI).They highlight that control variable inflation insignificant support that lower inflation leads to greater levels of FDI. H 6a: The level of inflation in the host country is negatively associated with its level of inward FDI. 8
Research Methodology and Empirical Analysis 3.1 Variables The main variables used to explain the drives of foreign direct investment inflows to Jordan are country risk ( finance, economic and political risk), macroeconomic factors (inflation, gross domestic products GDP and interest rate) and stock market price of following sectors (banks, services, industries and general sectors). 3.1.1 International Country Risk Guide ICRG gathers monthly data on a variety of financial, economic and political risk variables to calculate risk indexes in each of these categories. For instance, five financial, six economic and 13 political factors are used. Each factor is assigned a numerical rating within a specified range. The specified allowable range for each factor reflects the weight attributed to that factor. As high score indicates low risk. The Financial Risk on 50 points, Economic Risk on 50 points and Political Risk index is based on 100 points. First of all, the financial risk’s aim is to provide a means of assessing a country’s ability to pay its way. In essence, this needs a system of quantifying a country’s ability to finance its official, commercial, and trade debt obligations. Secondly, the economic risk is aimed at assessing a country’s current economic strengths and weaknesses. In general, if its strengths outweigh its weaknesses, it will present a low economic risk and if its weaknesses outweigh its strengths, it will present a high economic risk. Finally, the political risk is purposed to deliver a means of assessing the political stability of the countries covered by ICRG on a comparable basis. This is done by assigning risk points to a pre-set group of factors, termed political risk components. 3.1.2 Stock Market Price Stock prices shed light on the connection with FDI. Host country stock market valuations contain relatively more information about the marginal productivity of FDI, while source country valuations are likely to be more relevant to a foreign investor’s cost of capital. Thus, price of different stock market sectors are used including stock mark price of Jordanian bank, services, industries and general sectors. 9
Page 1 and 2: A Dynamic Model for determining Inw
Page 3 and 4: 1. Introduction Foreign direct inve
Page 5 and 6: investors look for the markets whic
Page 7 and 8: macro or micro measures taken by th
Page 9: exchange rate between the Japanese
Page 13 and 14: and error correction model (ECM) ar
Page 15 and 16: 3 Model Specifications 3.3.1 Unlagg
Page 17 and 18: uncorrelated and normally distribut
Page 19 and 20: ( ) ( ) ∑ ( ̂ ) ( ) ( ) ( ̂ ) W
Page 21 and 22: 4.2 Unit Root Test The Augmented Di
Page 23 and 24: Table 4: Summery Statistics of the
Page 25 and 26: Table (5) presents results of VAR l
Page 27 and 28: Table (7) presents the Granger caus
Page 29 and 30: Table7: Vector Autoregressive (VAR)
Page 31 and 32: Table 8 (part: b): Estimates of the
Page 33 and 34: services locally, remove any impedi
Page 35 and 36: Guru-Gharana, Kishor K., and Deergh

A Dynamic Model for determining Inward Foreign ... - Business School

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?