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

Table (7) presents the Granger causality tests for this 11 variables model. Each of the 11
variables appears to have explanatory power for one or more of the other variable in the
system. The effects are direct, but often complex and indirect. In the first equation, inward
FDI in Jordan appears to be significantly influenced by economic risk, the price of stock
market sectors (banks, services, industries and general sectors), inflation rate and GDP.
However, economic risk, stock market price of services and industry sectors, inflation rate,
GDP appear to have strong revers Granger causality on inward FDI in Jordan.
The results in table (7) are consistent with the following studies. Tekin (2012, 873)
investigates potential Granger causality among GDP and foreign direct investment least
developed countries for the period between 1970 and 2009 using panel data. Tekin reports
that GDP Granger causing FDI in Burkina Faso, Gambia, Madagascar and Malawi. Hansem
and Rand (2006 ) test for Granger causality between FDI and GDP in a sample of 31
developing countries finding that FDI has a positive impact on GDP in long run. Gurn-
Gharana and Adhikari (2011, 42) state that Granger GDP causality towards FDI get very
strong support at 1% significant level. Also, Feridun and Sissoko (2011, 13) examine the
relationship between GDP and FDI for Singapore. They find that causality running from
FDI to GDP.
The third equation inward FDI and financial risk have effects on economic risk at 10%, but
the stock market price appears to have a significant impact on economic risk at 1%. The
services stock market price sector is explained by inward FDI, banks, industries and general
sector at 10% and 5% respectively. Inward FDI, economic risk, banks, services, general
and GDP affect the behaviour of the industries stock market price at 5%. The stock market
price sectors affect inflation at 10%, but the inward FDI, economic and financial risk at 5%
and 1% respectively. Inward FDI, economic, industries stock market price, inflation,
interest rate, GDP appears to be explained by the movement of all variables at 1%.
The error correction model is applied to capture the short run dynamic of this model. Table
8 (part a and part b) illustrate the results of error correction model (ECM). Only one error
correction term is included even there are more than one co-integrating vectors as suggested
by Johansen’s multivariate tests because this study investigate the inward foreign direct
investment in Jordan rather than of other equations from the variables (i.e country risk,
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