Economical determinants of domestic

---

European Scientific Journal
April edition vol. 8, No.7
ISSN: 1857 – 7881 (Print)
e -
ISSN 1857- 7431
1
UDC:330.357:330.322(569.5)
330.357:330.727.22(569.5)
ECONOMICAL DETERMINANTS OF DOMESTIC
INVESTMENT
Hazem B. Al khatib, PhD
Al Ahliyya Amman University – Jordan
Gassan. S. Altaleb, PhD
The World Islamic Sciences and Education University
Samer . M. Alokor
The World Islamic Sciences and Education University
Abstract
This study analyzes the trends of determinants of investments within the period (1980-2010)
with focus on post-reform era efforts, both the short-run and long run movement of the
investment process, using the co-integration econometrics method to estimate the dynamic of
the variables in the study. This is in order to assess their behavior over time, and evaluate
how these have either hindered or encouraged the growth of investment in the Jordanian
economy.The results confirm previous results found in empirical literature. Namely, the
growth rate GDP and exports and their significance in stimulating domestic investments. In
addition to Foreign direct investment (FDI), and the development level of the financial sector
and human capital in stimulating domestic investment only in the long-run. These results
have implications for policy markets, investment prospectors, and foreign and domestic
investors.
Keywords: Foreign Direct Investments, GDP, Jordanian Economy
1.Introduction
There is, theoretically and empirically, consensus on the relation between domestic
investment and economic growth, but, there isn't a similar consensus on FDI and economic
growth. Thus, the focus and the attention of both researchers and policy-makers were on FDI
inward to find empirical hypothesis on FDI-lead growth. Recently, empirical evidence

---

European Scientific Journal
April edition vol. 8, No.7
ISSN: 1857 – 7881 (Print)
e -
ISSN 1857- 7431
2
suggests that the fastest growing countries are the biggest FDI-host countries (Fabry and
Zeghni, 2002), which, leads to more attention on the determinants of FDI than domestic
investment. However, after the Asian financial crisis, the attention shifted back to domestic
factors such as domestic investment as a leader of economic growth. How did domestic
investment increase in some developing countries and did not in others? In particular, what
causes domestic investment and what retards it? These questions were asked.
Jordan recorded good rates of economic growth during the first half of the 2000’s,
ranging from 4.1% to 7.7%, but in contrast, domestic investment growth rates did not show
any improvement during the 2000’s. Therefore, it isimportant to discuss this matter,
especially since it is well known that high domestic investment growth rates are critical in
generating economic growth particularly in countries such as Jordan that are characterized by
scarcity of resources, and high unemployment and poverty rates. Furthermore, policy-makers
need to know what factors are crucial in determining the long-run domestic investment
process. Specifically, what causes domestic investment in Jordan and what holds it back?
And is FDI contributing directly to domestic investment stimulation?
The purpose of this paper is: first to investigate the long and short-run determinants of
domestic investment in Jordan as one of the emerging economies; seeking to encourage
domestic investment as well as enhancing foreign investment and hereafter increasing its
economic growth. Second, to examine empirically the role of FDI on domestic investment,
and namely, whether, there is evidence that the inflow of FDI "crowded in" domestic
investment or not.
This paper contributes to the literature in the following ways: first, a large body of the
literature is on the inflows of foreign direct investment and emphasizes how to encourage it
as it has a vital role in economic growth, despite the shortage of empirical literature on
domestic investment and its determinants, as most of the literature shows both domestic and
foreign investment lead to high growth rate. Second, many empirical studies have been
carried out on the relationship between domestic investment in developing countries and its
determinants, although the results are mixed. The ambiguous results of existing studies,
mainly stemming from the inappropriate econometric methods, call for further study of
methodology and empirical model building. The results from the autoregressive distributed
lag (ARDL) approaches according to Pesaran et al. (2009) are more likely to be more
persuasive than their predecessors. The use of the test is necessary because the power of
conventional unit root tests may be low for a time span typically available for empirical

---

European Scientific Journal
April edition vol. 8, No.7
ISSN: 1857 – 7881 (Print)
e -
ISSN 1857- 7431
3
works. The approach also allows us to take on the estimation problem of non
-