Abstract
This study examines the causal effect between foreign direct investment (FDI) and financial market development (FMD) in Jordan. Annual time-series data is used over the period 1978-2017. Principal component analysis is employed to create two indices to reflect FMD, namely stock market development (SMD) and banking sector development (BSD). To detect the causal effect between FDI and FMD, Vector Autoregressive Regressions, Granger Causality test and Johansen Co-integration test are employed in the analysis. In the short-run, the findings of Vector Autoregressive Regressions document a positive significant effect between SMD and FDI, however, no effect is found between BSD and FDI. The Granger Causality test shows unidirectional causality between SMD to FDI. Moreover, the Johansen Co-integration test reveals a long-run equilibrium relationship between FDI and FMD. These results are expected to have important implications for policy makers in Jordan.
Highlights
Foreign direct investment (FDI) is defined as investments outside the investors’ border
This study examines the dynamic effect between foreign direct investment and financial market development in Jordan
Financial market development is reflected by two indices, stock market development and banking sector development
Summary
Foreign direct investment (FDI) is defined as investments outside the investors’ border. Variables, including several papers examining the relationship between financial market development and economic growth The majority of these papers document a positive association between the two variables see for example (Levine and Zervos, 1996; Korgaonkar, 2012 and Nazir, Nawaz, Anwar& Ahmed, 2010). FMD is reflected by two factors, namely (SMD) and (BSD) (Naceur & Ghazouani, 2007; Kar, Nazlioglu, & Agir, 2011) The importance of this topic is inherent in the fact that a developed financial market in terms of stock market and banking sector directly simulates economic growth. Providing empirical evidence on such relationships and using up-to-date data from a developing country like Jordan is expected to contribute to the existing economic literature These findings are expected to have important implications for policy makers. The remainder of this paper is structured as follows: Section 2 provides the relevant literature review and hypotheses development; Section 3 presents the data, study variables and the methodology, while the empirical results are presented in section 4; the final section concludes the paper
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