College of Business, Hospitality &Tourism Studies

Working Paper Series

No. 06/12

Title

FDI and export-led growth in Jordan: evidence from

cointegration and causality test
Authors

Fuad M. Kreishan,
Al-Hussein Bin Talal University, Maan, Jordn
Email: fuadkreishan@yahoo.com
and
Janesh Sami,
Fiji National University,
E-mail: janesh.sami@fnu.ac.fj

Date: October, 2012

School of Economics, Banking and Finance,
Nasinu Campus, Nasinu, Fiji.

This paper presents work in progress in the College of Business, Hospitality and Tourism Studies, FNU.
Comments are welcomed from all stakeholders and should be addressed to the corresponding author.
Copyright 2012 by the author. All rights reserved. 1

FDI and export-led growth in Jordan: evidence from cointegration and causality test
by
Fuad M. Kreishan,
Al-Hussein Bin Talal University, Maan, Jordn
Email: fuadkreishan@yahoo.com
and

Janesh Sami,
Fiji National University,
E-mail: janesh.sami@fnu.ac.fj

Abstract
In this paper, we examine the relationship between foreign direct investment (FDI), exports and
economic growth in Jordan by applying bounds testing procedure suggested by Pesaran et al.
(2001) and Johansen cointegration test (1988,1990). Both cointegration tests reveals, that there
is a long run relationship between economic growth, exports and foreign direct investment in
Jordan for the sample period 1970-2010.We find robust evidence based on three estimators that
foreign direct investment and exports exert positive and significant impact on economic growth
in the long run. Results from causality tests indicate that there is long run causality running from
exports and foreign direct investment to economic growth in Jordan. It is thus important that
policymakers in Jordan remove obstacles to FDI inflow and improve absorptive capacity to reap
positive growth effects.
Key Words: Foreign direct investment, exports, economic growth

1. Introduction
The issue of foreign direct investment (FDI) has created an extensive debate among scholars
and policy-makers in both developed and underdeveloped countries. The issue has been
investigated thoroughly, particularly, in terms of its impact on the economic activities in the
host countries at macroeconomic and microeconomic level using different methods and
models. FDI can contribute positively to the growth and development of developing countries
by bringing capital, employment, technology, market access, and managerial skills, Borenzstein
et al. (1998), Klein et al.(2003).According to UNCTAD (2003), FDI plays an important role in the
long-term economic development of developing countries with its great potential to create
jobs, raise productivity, enhance exports and transfer technology. In this context, Jordan is
classified by the UNCTAD investment benchmarking system as among the top twenty countries
in the world in terms of attracting inflows of foreign direct investment, UNCTAD (2006).
Supported by long-run structural adjustment programs and economic reform, Jordan has an
almost fully liberalized trade system, a liberalized exchange regime, permitted full ownership of
investment in most sectors, a good infrastructure, and the highest rate of literacy in the region,
UNDP (2002).
However, several international reports agree that Jordan investment atmosphere is still
suffering from procedural complexes regarding foundation of investment projects such as:
projects licensing, the amount of procedures required to commence the project, taxation, AlNuemat (2009).The impact of FDI on economic growth could be two-fold. It will have an
increasing effect on trade if it is export-oriented or a decreasing effect if it aims at the host
country market. Therefore, FDI is expected to have direct or indirect impact on growth, through
trade. Jordanian economic policies has highlighted the importance of the creating an
environment to attract FDI, which could lead to the transfer of technology and increase
production and exports. This, in turn, becomes the main engine of our motivation to investigate
FDI-economic growth relationship in Jordan during the period 1970-2010. Thus in this paper,
our objective is to examine the long run relationship between foreign direct investment,
exports and economic growth in Jordan by applying bounds testing procedure suggested by
Pesaran et al.(2001) and Johansen cointegration test (1988,1990). Studying the relationship
between FDI inflow to Jordan and economic growth is very important to economic policymakers. The importance of the present study arises from the fact that FDI flows play a key role
in developing countries through affecting macroeconomic variables such as economic growth,
employment and exports. Therefore, examining the relationship between foreign direct
investment, exports and economic growth in Jordan will help policy-makers plan their economic
strategy accordingly.
The present study differs from existing literature on FDI-growth nexus in Jordan in three
important ways. Firstly, the present study resorts to two cointegration tests namely bounds
testing procedure suggested by Pesaran et al.(2001) and Johansen cointegration test
(1988,1990) to ascertain the existence of long run relationship between FDI,exports and
economic growth1. It is expected that use of two cointegration test helps us to make a
3

confident decision on existence of long run relationship between exports, FDI and economic
growth. Our study, thus represent improvement studies by Hisarcikilar et al.(2006) and AlHabees and Khasawneh (2011), as these studies have examined the relationship between FDI
and economic growth in Jordan in bivariate framework. Secondly, the long run elasticities are
estimated using two additional estimators namely ordinary least squares estimators (OLS) and
fully modified ordinary least square estimators proposed by Phillips and Hansen (1990).The use
of two additional estimators help assess robustness of our estimates. Thirdly, this study
examines the causal relationship between FDI, exports and economic growth by utilizing two
popular techniques of causality tests. Vector Error Correction Model (VECM) and TodaYamamoto Causality procedure (1995) are used to examine if there is any causality between FDI
and economic growth. The reason behind using two causality procedures that Toda-Yamamoto
procedure (1995) are more reliable compared to VECM due to fact that it can be applied even if
the variables are I(0),I(1) or I(2) and regardless of cointegration properties. This particular
attractive given that pre-testing for unit roots and cointegration is problematic in sample sizes.
Furthermore, causality results from Toda-Yamamoto procedure (1995) can be used to verify the
causality results from VECM analysis. To best of our knowledge, this is the first study to
examine the causal relationship between FDI and economic growth for Jordan using TodaYamamoto procedure (1995) for 1970-2010 period.
The rest of the paper is organized as follows; Section 2 examines FDI in Jordan, while Section 3
provides on literature on FDI and economic growth. Section 4 discusses the data issues and
econometric methodology that has been adopted in the present study. Section 5 discusses the
econometric results and Section 6 provides the concluding remarks.
2. Foreign Direct Investment in Jordan
FDI in Jordan includes both Arabic and Non Arabic capital inflow invested in projects owned by
non-Jordanian. In the last decades, Jordan has worked very hard in order to improve and
modernize the investment and FDI environment. These includes, passing a new Privatization
Law to enhance the privatization process, enactment of legislation harmonizing General Sales
Tax rates on domestic and imported goods, amending the customs law, the passing of new laws
on intellectual property and competition, modernization of judiciary systems and commercial
courts. The investigation of the FDI inflows to Jordan reveals that its size was relatively small
and unstable over the period 1970-1992. The FDI inflow increased from 0.1 million Jordanian
Dinar (JD) in 1970 to 28 million JD in year 1992 with average equaling to 12.6 million JD. The
relative small size of FDI can be explained by the fact that, prior to the economic liberalization
Jordan has followed inward looking economic policies, which has limitations for foreign
investors and free flow of FDI. Moreover, during the period 1970-1992, the region experienced
a history of political instability. However, after implementing the market oriented economic
policies during the 1990s, joining the European Partnership and WTO, establishing the Free
Trade Zones and passing new legislations for encouraging and attracting FDI, the volume of the
foreign capital flow increased rapidly. In addition, foreign capital was well attracted by the just
legal system, the well developed infrastructure and the availability of relatively cheap and
4

skilled labor. Also, a very important factor in attracting FDI was the availability of feasible
projects to be undertaken. In 2000, FDI increased to 312 million JD and exceeded 2 billion in
2007. However after 2007, the statistical data shows that the FDI inflow has decreased to reach
1.1 billion JD in 2010. Nevertheless, according to UNCTAD, Jordan was among the largest gainer
in terms of inward FDI performance index.
As pointed out by Bakir and Alfawwaz (2009), FDI in Jordan was attracted mainly by the
industrial sector and in particular by Industrial Free Zones and Cities and the privatized
enterprises, followed by the tourism, communications, services, transport, health and building
sectors. In light of the Arab Spring developments and political instability in the region, the
progress of FDI may not continue to assume the same path in the coming years. Privatization
programmes are no longer an open option and similarly, the construction sector is almost
saturated and facing a recessionary trend along with the financial sector.Therefore, it is
important to understand the trend of FDI, its effects and determinants in order to outline a
viable course of action to stimulate this important part of investment to the economy of
Jordan2. From what has been discussed above, Jordan has performed well in last five years or
so, in terms of attracting FDI, however, an investigation into the history of FDI inflows
movements demonstrates that these inflows have been driven by both regional developments
and internal improvements, therefore, more investment-friendly environment is necessary
option for Jordan in the future. We thus, aim to contribute existing literature on impact of FDI
on economic growth in Jordan using annual data from 1970-2010, with the help of modern time
series cointegration and causality techniques.
3. Literature Review
Both macroeconomists and micro economists are paying increasing attention to the relation
between FDI and the rest of the economy. The available studies on the impact of FDI on
economic growth presents two major opposite views. The first category illustrates that there is
a positive impact of the FDI on economic growth. de Mello (1999), Sjholm (1997) and Xu
(2000) found evidence that foreign investors raised economic growth in the receiving countries.
See also, Wang and Wong (2009), and Vu et al. (2008).Recent study by Tekin (2012) pointed out
positive relationship between FDI and economic growth in the host countries. Srinivasan et al.
(2011) investigated the long run and causal relationship between FDI and economic growth in
Bangladesh, India, Maldives, Nepal, Pakistan and Sri Lanka and found evidence of long run
relationship for all countries. Ramirez (2006) found that increases in foreign lagged investment
have positive and significant influence on labor productivity. Baharumshah and Thanoon (2006)
found FDI enhances growth in both short run and long run. Li and Liu (2005) examined the
effect of FDI on economic growth in 84 countries and found that there is significant
endogenous relationship between FDI and economic growth from mid-1980s.
The second category shows that there is a negative impact of foreign direct investment on
economic growth. A study by Kawai (1994) found that foreign direct investment had negative
effects on growth with the exception of Singapore, Peru and Philippines. Djankov and Bernard
5

(1999), Mencinger (2003) found that Foreign Direct Investment has negative effect on growth
for Central and East European countries. In the same context, the empirical study of
Borensztein et al. (1998), studied the relationship between FDI and economic growth in
developing countries. The result of the study indicated that the direct effect of FDI on growth is
negative for the host countries with low levels of human capital. A similar result also was
embodied in the report of the World Development Indicators (2000), which showed that FDI
had a negative effect for most of the 71 developing countries on their growth. Herzer et
al.(2008) found studied the impact of FDI on growth in 28 developing countries and found that
in vast majority of countries there is no short run or long run impact on growth. Studies by
Carkovic and Levine (2005), Saltz (1992) found similar evidence on impact of FDI on economic
growth.
The studies that attempted to study FDI and economic growth in Jordan include Louzi and
Abadi (2011), Zakia and Abulaila (2007), Shotar and Abdulrzag (2003). Louzi and Abadi (2011)
tested the FDI-led growth hypothesis in the case of Jordan over the period 1990-2009. In this
study, the empirical results of the error-correction model (ECM) showed that FDI inflows do not
exert an independent influence on economic growth.Alalaya (2010) examined the relationship
between economic growth, trade and FDI inflow and found that there is positive relationship
between FDI and economic growth for the period 1990-2008. Al-Habees and Khasawneh (2011)
find positive relationship between FDI and economic growth using simple linear regression
approach. Zakia and Abulaila (2007) investigated empirically the impact of both FDI and imports
on the economic growth of Jordan, over the period 1976-2003 using Vector Autoregression
(VAR). The result indicated bidirectional relationship between FDI and output and between
imports and output as well. Al-Abdulrazag and Talal (2007) employed Box-Jenkins methodology,
to forecast FDI inflows into Jordan over the period 2004-2025. The study showed that FDI
witnessed an increasing trend over the forecasted period 2004-2025. Also, it expected a
positive impact on the different macroeconomic variables in the economy of Jordan.
Hisarcikilar et al.(2006) examine the link between FDI and economic growth in
Algeria,Cyprus,Egypt,Israel, Jordan,Morrocco,Syria and Tunisia and Turkey and found that there
is no causality between FDI and economic growth in Jordan ,Israel,Alegria,Cyprus, Egypt.
Al-Iriani and Al-Shamsi (2007) investigated causality between FDI and economic growth for Gulf
Cooperation Council (GCC) countries such as Bahrain, Qatar, UAE, Oman, Saudi Arabia and
Kuwait and found that there is bi-directional causality between FDI and GDP.Metwally (2004)
develops simulataneous equation model to examine interaction between FDI, exports and
economic growth in Egypt, Jordan and Oman and found that feedback effect in relationship
between economic growth and capital inflow. Shotar and Abdulrzag (2003) investigated the
impact of foreign direct investment on economic growth in Jordan. They indicated the presence
of a long-run relationship between economic growth and FDI.

4. Econometric Methodology
4.1 Data and unit roots
The data for study was obtained from the Central Bank of Jordan. All variables are measured in
real terms. We converted all variables in natural logarithms to avoid the problem of
heteroscedasticity and obtain elasticities. The stationary properties of series are examined by
resorting to Augmented Dickey Fuller, ADF (1979, 1981) and Phillip-Perron, PP (1989) unit root
tests. All three variables are found to be I (1).To conserve space, the unit root results are not
provided here, but can be obtained from the authors upon the request.
4.2 Cointegration analysis
One of the major objectives of this study was to examine, if there is any long run relationship
between foreign direct investment (FDI), economic growth and exports. To achieve this
objective, the present study relied on two cointegration tests to investigate if there is long run
relationship between FDI, exports and economic growth. These two tests are bounds testing
procedure suggested by Pesaran et al. (2001) and Johansen cointegration test (1988, 1990). The
bounds testing procedure was developed by Peasaran et al. (2001) and can be applied
irrespective of order of integration of the variables. It thus to some extent avoids pre-testing for
unit roots. The performance of bounds test is also considered superior to alternative tests for
cointegration. Another notable advantage of this procedure is that the long run and short run
coefficients can be estimated simultaneously. There are two steps in conducting bounds testing
procedure. In the first step, the following equations were estimated using least squares:
n

i 1

i 1

i 1

InYt 0 i InYt i i InEt i i InFt i

(1)

1 InYt 1 2 InFt 1 3 InEt 1 1t

n

i 1

i 1

i 1

InEt 1 i InYt i i InEt i i InFt i

(2)

4 InYt 1 5 InFt 1 6 InEt 1 2t

n

i 1

i 1

i 1

InFt 2 i InYt i i InEt i i InFt i

(3)

7 InYt 1 8 InFt 1 9 InEt 1 3t

In equation (1)-(3) above, represents the first difference operator,Y t is real GDP,Et is real
exports and Ft is foreign direct investment and 1t, 2t, 3t are serially independent random
errors. The bound testing procedure relies on F-test to investigate the existence of long run
relationship and F-test shall indicate which variable should be considered dependent variable.
7

In equation (1), when real GDP is considered the dependent variable, the null hypothesis of no
long run relationship between the variables can be tested by testing the hypothesis of
H0: 1 2 3 = 0 against the alternative hypothesis of cointegration H1: 1 2 3 0.
In equation (2), when real exports is considered the dependent variable, the null hypothesis of
no long run relationship between the variables can be tested by testing the hypothesis of
H0: 4 5 6 = 0 against the alternative hypothesis of cointegration H1: 4 5 6 0.
Finally in equation (3) ,when foreign direct investment is considered the dependent variable,
the null hypothesis of no long run relationship between the variables can be tested by testing
the hypothesis of H0: 7 8 9 = 0 against the alternative hypothesis of cointegration
H1: 7 8 9 0.
The resulting F-statistics from F-test must then, be compared to the critical values provided by
Narayan (2005).The F-test has non-standard distribution that depends upon: 1) number of
independent variables;2) number of observations (sample size).;3) whether the ARDL model has
intercept and/or trend.;4)whether the variables included in ARDL model are I(0) or I(1).If the
computed F-statistics falls below the lower bound critical value, then the null hypothesis of no
cointegration cannot be rejected .In contrast, if the computed F-statistics exceeds the upper
bound critical value, the null hypothesis of no cointegration can be rejected. This would imply
there is cointegrating or long run economic relationship between the variables. It is also
possible that the computed F-statistics falls between lower bound critical value and upper
bound critical value. Once the cointegration is confirmed, one can proceed to estimate the long
run and short run coefficients. We used ARDL model to estimate the short run and long run
coefficients. Pesaran and Shin (1999) show that ARDL based estimators of long run parameters
are super-consistent in small sample sizes.
4.2 VECM and Toda Yammamoto Granger Non Causality Test (1995)
In order to examine the causal relationship between economic growth, FDI and exports, VECM
model is adopted. The major advantage of this particular approach to causality testing is that it
allows one to examine the issue of short run and long run causality between variables. By
including lagged Error Correction Term (ECT) into the model, it provides an additional channel
through which causality can run between variables. However, the VECM model is adopted if
there is cointegration between variables.
k

i 1

i 1

i 1

InYt i InYt i i InEt i i InFt i 1 ECTt 1 v1t

k

i 1

i 1

i 1

InFt i InYt i i InEt i i InFt i 2 ECTt 1 v2 t

(4)

(5)

i 1

i 1

i 1

InYt i InYt i i InEt i i InFt i 3 ECTt 1 v 3 t

(6)

In equation (4)-(6), all variables are as previously defined.1t, 2t, 3t are the error terms, ECTt-1 is
the lagged error term from cointegrating model. It is assumed that error terms are white noise
with zero mean, constant variance and no autocorrelation. To test for short run causality from
foreign direct investment to economic growth, the appropriate null hypothesis is: H0:1= 2= k
(FDI Granger does not cause economic growth), where k =1, 2, 3..k, against the alternative
H1:1= 2= k. (FDI Granger does cause economic growth). Long run causality from exports and
FDI to economic growth exists if there estimated coefficient 1 in equation (4) is found to be
statistically significant.
Given that finding no cointegration is common in studies with less number of observations and
this complicates testing for cointegration between variables. The present study resorts to a very
simple procedure to make causal inference proposed by Toda-Yamamoto(1995).This procedure
can be applied regardless of whether the series are I(0),I(1) or I(2) and cointegrated or not. The
implementation of this procedure is also quite simple. The lag length k of the VAR is selected
based on Schwarz Bayesian criterion (SBC) and order of integration dmax is decided. An
augmented VAR in levels is estimated with optimal lag length of p = (k+ dmax).Accordingly, in the
present case,lag length of VAR was found to be 2,while dmax was found to 1.This implies that
following system of equations must be estimated using Seemingly Unrelated Regression (SURE)
as it considered more efficient.
InYt 0
InEt 0
InFt 0

k d max

k d max

k d max

i 1

i 1

i 1

1i InYt i

1i InEt i

k d max

k d max

k d max

i 1

i 1

i 1

1i InYt i

1i InEt i

k d max

k d max

k d max

i 1

i 1

i 1

1i InYt i

1i InEt i

2i

InFt i t

(7)

2i

InFt i t

(8)

2i

InFt i t

(9)

5. Econometric Results
5.1 Cointegration results
Equations (1)-(3) using annual data from 1970-2010 using least squares method. The lag length
(n) was decided on SBC criteria. Table 1 below reports test for cointegration based on bounds
testing procedure (2001) and Johansens multivariate cointegration approach (1988, 1990). The
results of bounds test imply that there is long run relationship between foreign direct
investment, exports and economic growth, when economic growth is considered the
dependent variable. It also indicates that exports and foreign direct investment should be
9

considered the independent variables. Knya (2004) points out in case of low order VAR models
or with smaller samples (n< 100), the Johansen method is biased towards spuriously finding
cointegration. Thus given the sample size, the test statistics computed Johansens cointegration
approach is adjusted by Reinsel-Ahn correction factor (1992). Based on trace test and Eigen
test, the null hypothesis of no cointegrating vector is rejected in favor of atleast one
cointegrating vector. Regardless, both test results point to existence of a long run relationship
between foreign direct investment, exports and economic growth at 5% significance level. Our
finding of long run relationship between FDI and economic growth is consistent with findings of
Al-Abdulrazag and Talal (2007).
INSERT TABLE 1 HERE

Once cointegration is confirmed, the following ARDL (m, n, p) specification was used to
estimate the long run parameters of exports and FDI.
m

i 1

i 1

i 1

InYt 1 InYt i 2 InEt i 3 InFt i vt

(10)

In estimating the ARDL model, a maximum lag length of 2 was used and estimated model is
selected based on minimum SBC. Pesaran (1999) suggest use of lag length of 2 with annual
data. The estimated long run coefficients are reported in Table 2. The result indicates the
exports and foreign direct investment has positive impact on economic growth in Jordan.
INSERT TABLE 2 HERE
In the long run, increase in foreign direct investment by 1% is associated with about 0.15% in
economic growth, holding other variables constant. The effect of foreign direct investment is
estimated using two additional estimators namely ordinary least square estimator (OLS) and
Fully-Modified ordinary least square estimator (FMOLS).The estimated long run elasticities for
exports and FDI are fairly consistent. In general, all three estimators indicate that foreign direct
investment has positive and significant impact on economic growth. In the long run, an increase
in exports by 1% results in 0.49-0.65% increase in economic growth, ceteris paribus.Thus export
expansion has positive and significant impact on economic growth for Jordans economy. Our
finding of positive impact on FDI growth lends supports to findings of Habees and Khasawneh
(2011), Alalaya (2010), Zakia and Abulaila (2007).
5.2 Short run analysis
The effects on exports and foreign direct investment on economic growth are also examined in
the short run using equation (11) and results are reported in Table 3.
10

i 1

i 1

i 1

InYt ECM t 1 1i InYt 1 1i InEt 1 1i InFt 1 ut

(11)

In short run, it is found that past years foreign direct investment has negative impact on
economic growth. However, the estimated effects is relatively small (0.02).Meanwhile, the
short run export expansion by 1% leads to 0.12% increase in economic growth, ceteris paribus.
The significance of coefficient of ECMt-1 lends supports to two cointegration test results that,
there is cointegrating relationship between foreign direct investment, exports and economic
growth. According to Kremer et al. (1992), this is an efficient way of establishing cointegration
between variables. The estimated speed of adjustment is -0.24 and suggests that it takes about
four years for economy to reach back to equilibrium following disequilibrium.
INSERT TABLE 3 HERE
A number of diagnostic tests were conducted to ensure the estimated model is empirically
valid. The diagnostic results indicate there is no serious evidence of any violation of serial
correlation, non-normality, heteroscedasticity and mis-specification of the model .To conserve
space, the results are not provided but are available from the authors upon request. The
stability of estimated relationship is then assessed by resorting CUSUM and CUSUMSQ tests
proposed by Brown et al.(1975).The plots indicate that the relationship between the variables
are stable for the sample period 1970-2010 and there is no structural break in the relationship.
The results are not provided here to conserve space but are available from the authors upon
request.
The results from VECM causality analysis suggest in the long run, there is causality running from
exports and foreign direct investment to economic growth in Jordan at 10% significance level.
Also in the long run, exports and economic growth Granger causes FDI at 5 % significance level.
This suggests that in the long run, there is bi-directional causality between FDI and economic
growth in Jordan. This finding supports results from Metwally (2004) and Al-Iriani and Al-Shamsi
(2007) for the (GCC) countries such as Bahrain, Qatar, UAE, Oman, Saudi Arabia and Kuwait.
Our findings however, does not support results from Hisarcikilar et al (2006) for Jordan. Our
results also indicate that there is no short run causality between exports, FDI and economic
growth.
5.3 Causality based on VECM and Toda-Yamamoto Modified Wald test (1995)
INSERT TABLE 4 HERE
The sensitivity of the VAR-ECM causality results are assessed by conducting modified Wald test
proposed by Toda-Yamamoto (1995).The results are reported in Table 5.The null hypothesis
that exports does not Granger cause economic growth is rejected at 5% significance level, thus
suggesting causality running from exports to economic growth. Similarly, the null hypothesis
11

that foreign direct investment does not Granger cause economic growth is rejected at 5%
significance level. In general, results from Toda-Yamamoto Modified Wald test confirm the
causality result from VAR-ECM, that there causality from exports and foreign direct investment
to economic growth. The results however, only support presence of causality from exports and
FDI to economic growth and not from exports and economic growth to FDI.Regardless, both
frameworks agree that there is causality from exports and FDI to economic growth in Jordan.
INSERT TABLE 5 HERE
6. Conclusion and Policy Implications
The notion that foreign direct investment can have positive and significant impact on economic
growth has prompted many countries to attract foreign investment. This paper has attempted
to contribute to existing body of evidence on foreign investment and economic growth nexus
for Jordan by examining the existence of long run relationship by resorting two cointegration
tests namely bounds testing procedure (2001) and Johansens multivariate cointegration
approach (1988, 1990) for the period 1970-2010. Results show that there is strong evidence of
long run relationship between foreign direct investment, exports and economic growth in
Jordan. Causality relationship between foreign direct investment, exports and economic growth
was studied using VAR-ECM and Toda -Yamamoto modified Wald test (1995).We find consistent
result of causality running from exports and foreign direct investment to economic growth in
Jordan.
Policymakers are thus advised to carefully design policies in regards to foreign
investment. The long run suggest, if more foreign investment is attracted into the country, the
effects on economic are going to be positive. The negative effect in short run, suggest negative
effects of foreign investment possibly outweigh the positive effects. Developing the financial
sectors, improving the quality of human capital, strengthening the legal systems can strengthen
the role of foreign direct investment in the economy. Areas of focus should contain creating
sustainable private-public partnerships, flexible labor markets, setting a suitable regulatory
framework and procedures, targeting multi-national firms and non existence of corruption, and
creating of potential investment opportunities. In other words, Jordan needs to improve its
absorptive capacity. One major limitation of this study is that we have not thoroughly studied
the integrational properties of three series through relatively stronger unit root results. Future
studies can extend the present study by including other additional variables such as
employment, imports etc that can possibly affect the nature of causal relationship between
foreign direct investment and economic growth.

12

Footnote:
1. To best of our knowledge, there is only one study by Alalaya (2010) that examined the
relationship between FDI and growth using bound testing procedure (2001).Our study
differs from this study in sense that we use Johansen(1988,1990) cointegration technique
to verify cointegration results. The test statistics are corrected following Reinsel-Ahn (1992)
procedure. Secondly, the author examined the relationship for the period 1990-2008,
whereas we consider a sample period of 1970-2010.Thirdly, three estimators are used to
estimate the long run impact of FDI and exports on economic growth.Fourthly,we examine
the causal relationship between FDI and economic growth using VECM and TodaYamamoto Granger non causality test(1995).
2. For recent forecast of FDI inflow in Jordan, see Alrawasdeh et al. (2011) and Al-aduldrazag
and Bataineh (2007).

13

Results

Table 1. Cointegration Test results

Bounds Test Results
Computed F-Statistics
F (In Y / In E, In F) = 6.685**
F (In E / In E, In Y) = 2.807
F (In F / In E, In Y) = 2.090
Johansen Cointegration Test Results
Null Alternative
Trace Statistic
r=0
r<= 1
r<= 2

r = 1 **
r=2
r=3

58.438
11.628
5.174

Critical Values from Narayan (2005), Table III

K=2
I(0)
I(1)
1%
5.893
7.337
5%
4.133
5.260
95% CV
22.040
15.870
9.160

Maximum Eigenvalues 95% CV

Statistic
75.241
34.870
16.803
20.180
5.174
9.1600

Note: ** denotes statistical significance at 5% level. Test statistics are adjusted by Reinsel Ahn factor
(1992) and deterministic terms are decided based on Pantula principle (1989).

Table 2. Estimated Long Run elasticities; Dependent Variable: In Yt

Independent Variables
ARDL
OLS
FMOLS
In Et
0.49(8.67)***
0.65(21.54)***
0.64(28.54)***
In Ft
0.15(4.42)***
0.05(2.34)**
0.06(2.89)***
Constant
2.09(15.35)***
1.65(28.73)***
1.68(28.54)***
Note: *** and ** indicates statistical significance at 5% and 1% level respectively.

Table 3. Estimated Short run elasticities

Dependent variable is In Yt:
In Ft
0.011
(1.4563)

In Ft-1
-0.022
(-2.714)***

In E t
0.123
(3.367)***

C
0.523
(5.846)***

Note: ***indicates statistical significance at 1% level respectively

14

ECMt-1
-0.250
(-4.652)***

Table 4. VECM Causality Analysis

Dependent variables
InYt
InYt
InEt
0.671[0.734]
InFt
1.135[0.567]

F test statistics
InEt
1.274[0.529]
1.289[0.525]

InFt
4.509[0.105]
0.265[0.876]
-

ECMt-1
-0.234[0.078]*
-0.383[-1.343]
-0.503[0.039]**

Note: Figures in square brackets are computed p-values. ** and * represents statistical significance at
5%, 10% respectively.

Table 5. Toda-Yamamoto Modified Wald test results (1995)

Exports does not Granger cause economic growth
FDI does not Granger cause economic growth
Economic growth does not Granger cause exports
FDI does not Granger cause exports
Economic growth does not Granger cause FDI
Exports does not Granger cause FDI
Note: **indicates statistical significance at 5% level.

15

2 (2) value
8.873**
8.262**
0.135
0.001
0.804
0.357

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