The Causal Relationship among Foreign Direct Investment, Domestic Saving and Economic Growth in Jordan during the Period (1975–2013)

Atif Issa Batarseh,Izz Eddien N Ananzeh

doi:10.5539/ijbm.v10n1p73

Abstract

The research aims at analyzing the causal relationship among Foreign Direct Investment, Domestic saving and Economic Growth in Jordan during the period (1975–2013).The Co-integration Test of Johansen shows that foreign direct investment and domestic saving are in the long run relationship with real income growth in Jordan. Whereas, the impact of foreign direct investment on economic growth is statically significant while the impact of domestic saving is not statistically significant on economic growth in the long run in Jordan.The results of error correction model show that: ECT (Error Correction Term) is 5.5619%, negative and statistically significant at ?= 1% which means that the short run values of GDP converge it's long run equilibrium level by 5.5619% speed of adjustment every year by contribution of Foreign Direct Investment (FDI) and Domestic saving (DS) in Jordan.Granger Causality Test show that foreign direct investment in Jordan is output and saving driven which means that if income and saving increases, Jordan will attract more foreign direct investment.

Highlights

Jordan is a country which is classified as one of 20 countries that follow UNCTAD benchmark of investment. it’s highly open for attraction of inflows of foreign direct investment, the mean reason for inflow or the openness of the foreign direct investment (FDI) of the company is the increase in the liberalization and the privatization in the country, in addition to many other factors like investment encouragements legislations, joining the world trade organization (WTO)
From level Equation figures we can see that when FDI increases by 1%, gross domestic product (GDP) increases by 0.307 % in long term and its statisticall significant at α = 0.10, on the other hand when there is an increase in domestic saving (DS) by 1 %, GDP decreases by 0.082 % in the long term, but its not statistically significant
The result of this research show that a long relationship between real GDP and its explanatory variables of FDI and DS, so it suggests that FDI and DS are in the longterm equilibrium relationship with the real income (Economic growth in Jordan)

Summary

Introduction

Jordan is a country which is classified as one of 20 countries that follow UNCTAD (world investment report 2013) benchmark of investment. it’s highly open for attraction of inflows of foreign direct investment, the mean reason for inflow or the openness of the foreign direct investment (FDI) of the company is the increase in the liberalization and the privatization in the country, in addition to many other factors like investment encouragements legislations, joining the world trade organization (WTO). Salahuddin et al (2010) say that the effect of FDI on growth is a theoretical and empirical fact and affects growth in 2 ways: First: it contributes to growth by capital accumulation which helps in corporation of new inputs into the production channels of the country, production can be improved by foreign technology transfer. There are some studies in literature that show the relationship between domestic saving (DS) and economic growth, theoretically association among domestic saving (DS) and income was explained by Harrod (1939) and Domar (1946) models: which stat if there is a high level of saving in a country, it provides funds for firms to borrow and invest. The casual relationship between FDI and DS is investigated in the literature (Salahuddin et al, 2010) state the fact that FDI and DS have bi-directional relationship, but stronger from DFI to www.ccsenet.org/ijbm

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