Determinants of Inward Foreign Direct Investment in Jordan's Manufacturing Sector (1995-2010): Empirical Study

Abstract

Due to the increase of foreign share in Jordanian manufacturing industry, the objective of this study is to evaluate the determinants of inward FDI in Jordan's manufacturing sector during the Period 1995-2010. An econometric model "Gravity model" was used to evaluate the factors that influence the distribution of FDI across industries and countries of investor-origin A disaggregated analysis allows us to consider the determinants of inward FDI industrial manufacturing sectors; these determinants are not uniform across the industries. Such analysis will allow us to determine the implications for existing and potential policies that affect FDI behavior in these different sub-industries. Maximum likelihood estimation techniques based on the Tobit Model have been used to evaluate the determinants of inward FDI. The results are largely confirmed with the validity of the Gravity Model approach for determinants of FDI analysis. GDP and geographical proximity were found to be significant determinants of FDI inflows for the manufacturing sector for aggregate analysis; on the other hand for disaggregate analysis, seven out of eight manufacturing industries were significant. Concerning the influence of other country characteristics on FDI inflows, the study shows that there is considerable diversity across manufacturing industries. The study also supports a positive correlation between foreign investment and trade "exports and imports" in Jordan. This suggests that FDI and trade are complementary, rather than substitutes. The study findings have a number of policy implications for Jordan. First, the difference in determinants across manufacturing industries suggests that investment promotion strategies should be differentiated across industries and countries. Second, the findings on the complementarily of trade and FDI in Jordan should convince policy makers about the benefit of liberal trade policy; therefore if Jordan's choice is still in favor of promoting FDI inflows, Jordan should continue with an open trade policy.