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

1. Introduction
Foreign direct investment (FDI) is the most significant factor of economic growth, which
encourages productivity of the national economy, augment’s the use of technology,
reducing unemployment by creating new jobs and other encouraging output that
differentiate this form of investment from other funding sources.
Consequently, most developing countries realised the need for FDI to increase rates of
economic growth. Despite the race among Arab economies to improve its business
environment to pull foreign investment via contemporary legislations to attract this form of
investment and increase the competitiveness of their national economy, most of these
countries are still suffering from a low volume of inward FDI compared to other
economies. This is due to the absence of efficient legislation that should support the process
of attracting inward FDI. For example, impose higher taxes, the absence of political and
economic stability in some countries and the existence of administrative and financial
corruption.
Like the rest of the world, foreign investment plays a vital economic role in Jordan and
remains one of the main sources to enhance economic development. Therefore, the main
aim of this paper is to investigate the dynamic movements of inward FDI in Jordan, country
risk (financial, economic and political risk), macroeconomic factors (inflation, interest rate
and GDP) and stock market price by implementing VAR, ECM, co-integration test and
Granger causality test.
Politically, Jordan’s foreign policies play a major role in making Jordan highly attractive
for (FDI). For instance, in 1996, Jordan signed a peace agreement with Israel accompanied
by Bill Clinton. As a result the Qualifying Industrial Zones (QIZ) was created by the U.S.
Congress to support the peace process. In 1998, the United States Trade Representative
(USTR) designated Jordan's Al-Hassan Industrial Estate in the northern city of Irbid as the
world's first QIZ (CRS Report for Congress 2001, 2).
Economically, Jordan is an open economy and has undertaken a program of economic
reform covering most features of Public Finance Management. The three core objectives of
the program of reform are to ensure fiscal sustainability, efficient resource allocation and
operational efficiency. The economy has experienced sustained economic growth in recent
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