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

inflation, interest rate, GDP and so on). More precisely, financial risk has negative effect on
inward FDI and political risk significantly influences inward FDI with negative sign, but
the economic risk has a significant positive sign in determining inward FDI. This seems to
indicate that foreign investors would continue investing in Jordan although economic risk
perceptions have worsened in the short-run. Nevertheless, this empirical observation does
not encourage economic risk, but to highlight the short-run responses of inward FDI to
Jordan’s economic risk. In the long run, the economic risk has negative impacts on the
inward FDI in Jordan. It can be explained by Uctum and Uctum (2011, 475) study that
economic risk reduces the inflow of FDI.
Services, industry and general stock market price sectors affect inward FDI negatively, but
the banking stock market positively influences Inward FDI and statistically insignificant. In
the short-run high interest rate attracts more inward FDI. This shows that foreign investors
would remain investing in Jordan. It can be explained by Farrell et al (200, 17); Pan (2003,
832); Tolentino (2010, 114) and Uctum and Uctum (2011, 466) who report that interest rate
increase the inflow of FDI to host country. However, high interest rate would discourage
the inflow of FDI in the long-run as it considers high borrowing cost. This conclusion
supports Cuyvers et al (2011, 255) study the effects of interest rate on inward FDI in a
developing economy such as Cambodia. Cuyvers et al point out that a negative nexus
between interest rate and the level of inward FDI in a host country. Also, Wei and Liu
findings (2001); they indicate economic linkages between FDI and cost of borrowing. This
specifies that a lower cost of borrowing in the home country than in host country gives the
home country firms a cost advantage over their rivals in the host economy.
The significance of the error correction terms of these ECMs further reveals the following
interpretations. Firstly, it confirms the presence of a long –run equilibrium relationship
among the inward FDI and its determinants. Secondly, Jordan country risks,
macroeconomic factors and stock market price do jointly Granger causes the level of
inward FDI in Jordan. Finally, the estimated coefficient of error correction term indicate the
speed of adjustment among the variables towards long run equilibrium take 2 years to 2.5
years (58 months) approximately to return to equilibrium.
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