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

3 Model Specifications
3.3.1 Unlagged Model Specification
The empirical literature on the determinants of foreign direct investment inflows to
developing countries has generally focused on identifying the location specific factors and
relevant government policies that influence FDI and use models that do not have strong
macro-foundations and all country risk variables and all country risk variables (financial,
economic and political risk) such as (Alfaro et al 2004; Lim 2008; Asiedu et al 2009; Alfaro
et al 2010; and Karabay 2010; are examples of such studies). The specification of the
equation and choice of variables are inspired by the extensive empirical literature and
theories on FDI. In order to study the impact of country risk on foreign direct investment
inflows to Jordan there are two stages. The first stage involves a general form (unlagged
mode), the model is specified as follows:
( ) ( ) ( ) ( ) ( ) ( ) ( )
( ) ( ) ( ) ( ) ( )
Where represents the inward foreign direct investment in Jordan, the country risks
variables is as follows: stands for Jordan financial risk; means Jordan economic risk
and represents Jordan political risk. The stock market price variables are namely: where
refers to banks stock market price, represents services stock market price, stand
for industries stock market price and means stock market price of general sectors.
Finally, the macroeconomic factors as follows: where is Jordan gross domestic
products, is measured the inflation rate in Jordan and is the interest rate in Jordan
market
All variables in the above model have been selected on the basis of how frequently they
were cited in previous applied studies and how important (significant) were in determining
inward foreign direct investment.
Country risks such as financial, economic and political risk are included in the model
as several studies have found connection between inward foreign direct investments in host
economies. For example, Xing (2006, 2007) highlights that the real exchange rate risks as
one of the significant factors affecting Japanese FDI in China. , Busse and Hefeker (2007,
401) found that the political risks have significant impact on foreign direct investment
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