The impact of domestic and foreign investment on economic growth
The impact of domestic and foreign investment on economic growth
Standard Study
About Jordan for the period 1985-2016.
(This study is analytical and we apologize for not having access to data from 2017-2020 due to its unavailability)
"In light of the current conditions that the Jordanian economy is going through, investment is a lifeline to contribute to improving the level of economic performance, especially local investment, and the Studies Department puts this study in your hands to highlight the findings of the study that increasing investment by 1% will lead to economic growth by 4.8%.
Summary :
The study aimed to show the impact of local investment and its role in bringing about economic growth in Jordan 1985-2016, and the study assumed that local investment has a direct role in bringing about the growth process, and to test the hypothesis, a simple linear regression model was used, and the use of the least squares method to analyze the model. The results of the study led to: The existence of a direct relationship between the variables; As an increase in investment by 1% will lead to an economic growth of 4.48%, and the study recommended the government to encourage local investment because of its positive impact in generating growth, by directing government policies in the direction required to improve the investment environment and remove penalties for the local investor, as well. The study recommended the local investor to continue investing, as it is an effective contributor to achieving economic growth.
Key words: capital formation, investment, domestic investment, foreign direct investment, private investment, public investment, economic growth.
Introduction :
The Jordanian economy, after the first centenary of the Hashemite Kingdom of Jordan, is still a small and developing economy. Being an economy that does not depend on natural and non-oil resources, and the nature of such an economy requires it to employ all its available resources and capabilities in the best possible way in order to achieve growth and development, and the most important thing to do is work to improve the investment environment, encourage local investment and attract foreign investment, as Investment plays a major role in bringing about growth and development; As it is not possible to achieve economic development, even if countries have the ingredients for that, except with the availability of the necessary capital to achieve it. Therefore, countries aspiring to achieve growth in the short term and development in the long term must activate policies that will contribute to creating added value, and the most prominent of these policies encourage Supporting investment, and the importance of the study highlights the importance of investment, especially in developing countries, where it is highly relied upon to contribute to reducing the unemployment rate and moving the economic wheel. The study aims to demonstrate the impact of local investment on economic growth in Jordan during the period 1985-2016. The decline in foreign investment in Jordan during the past three years, as foreign direct investment decreased from 1.41 billion dollars in 2017 to 637 million dollars in 2020, according to what was indicated by the open data of the World Bank, and accordingly the question of the study emerges: Is there an impact on investment domestic economic growth? The study assumes that domestic investment leads to growth in output; Where investment is from the point of view of most economists of the most important economic activities that play an important role in achieving economic growth, since investment is one of the components of GDP (GDP = C + G + I + NX), and that an increase in investment will certainly lead to an increase in local production.
Scientific background and previous studies:
Several applied studies have been conducted that examine the relationship between local investment and GDP growth, whether on the state of the Jordanian economy or the economies of other countries. Foreign direct investment and saving are among the most important determinants of this relationship. Examined directly or indirectly the impact of domestic investment in achieving economic growth.
Where Naga (2005) conducted a study on Egypt for the period (1970-2012) with the aim of verifying the nature of the relationship between investment and saving on economic growth and determining the quantitative and causal relationships between variables, using the standard model based on the co-integration method of Joe Hanson and the (VECM) model. The researcher concluded that investment positively affects both savings and economic growth, and the results showed that in the long term there is a one-way relationship represented in that growth causes investment.
While in the short term, investment causes economic growth, and he recommended the necessity of stimulating investment because of its role in achieving economic growth in the short term, and the reflection of this growth on investment in the long term. While Momo's study (2013) aimed to investigate the impact of domestic investment and foreign investment on economic growth in Algeria during the time period (1990-2011), and to achieve the goal of the study, a vector autoregressive model (VAR) was used, the results of which showed a causal relationship between investment Domestic and economic growth, and the existence of a greater causal relationship between foreign direct investment and economic growth, that is, the effectiveness of foreign investment is greater than the effectiveness of domestic investment in bringing about economic growth, and he recommended increasing interest in encouraging both domestic and foreign investment, and reducing the negative effects of competition to make the relationship complementary between Foreign investment and local investment The study also recommended improving the investment climate by providing the necessary infrastructure.
Al-Abassi study (2018) came with the aim of addressing the nature of the role played by local investment in achieving economic growth in Turkey during the period (1970-2012), with a basic assumption that foreign investment has a greater impact than domestic investment in achieving growth, and in order to test the hypothesis, the use of The descriptive analytical model to determine the nature of the relationship between domestic and foreign investment, and used the empirical standard approach using the ECM model to measure the causal relationship and to estimate the impact of domestic and foreign investment on economic growth. The results led to the existence of a partnership between domestic and foreign investment that leads to economic growth. Foreign investment, local investment, and the adoption of the principle of smart partnership.
There are many studies that have examined investment and its impact on economic growth in Jordan. In the study of Al-Quran (1997) on the impact of private and public investment on economic growth in Jordan during the period (1969-1993), the study aimed to test the hypothesis adopted by the International Monetary Fund, which recognizes that private investment is more effective than public investment, by estimating The marginal productivity of public and private investment during the study period, and to test the hypothesis, the total production function was estimated using time-series data, and to ensure the accuracy of the results, the data were estimated according to the method of least squares OLS, and the most important results reached by the researcher were that local investment, both public and private, have a positive impact on GDP, noting that private investment has a greater and more important contribution than the government sector's contribution to achieving growth, and he recommended that the government should direct economic policies in the direction required to stimulate and encourage private investment.
The second objective of Al-Khatib's study (2006), which studies private investment and its determinants and its impact on growth in Jordan during the period (1978-1999), is to study the impact of private investment on economic growth and assumed that private investment has a direct and positive impact on creating economic growth. Through standard models that determine the nature of the relationship between private investment and GDP, using the method of least squares (OLS), the results showed that there is a relationship of private investment in bringing about economic growth with all other factors. Private investment, and the necessity of activating the Investment Promotion Corporation to play a major role in introducing the investor in the private sector to the available investment opportunities.
While the Al-Masaeed study (2008) dealt with measuring the impact of investment and intermediary financing on economic growth in Jordan during the period (1980-2004), the study aimed to discover the main factors that cause economic growth in Jordan as a non-oil country, and the joint integration model was used according to Measurement methodology ARDL (Autoregressive Distributed Lag), through which it is possible to determine the variables affecting economic growth in the short and long term, and the analysis showed a result that local investment and national exports are among the most important factors that cause economic growth, and the study recommended the need to enhance national exports, and improve The investment environment to stimulate local investment in order to achieve economic growth.
Finally, the study of Al-Muqabala and Al-Ajlouni (2016) came with the aim of studying the determinants of private investment in Jordan during the period (1976-2012) and the joint integration model and the ARDL methodology were used to test the long-term relationship to analyze the investment dynamics in Jordan during the study period, and the results of the standard analysis show that investment The private sector is positively correlated with real GDP growth, and the study recommended the need to give priorities to stimulate investment, especially private investment. This paper comes to study the impact of domestic investment on economic growth in Jordan during the period (1985-2016) directly; Without separating domestic investment into public and private investment, and without linking it to foreign direct investment or any other independent or intermediary variables that affect economic growth.
Measurement methodology and data sources:
To measure the impact of domestic investment on GDP growth, a simple linear regression model will be used as it studies the direct relationship between the two variables.
Yt = α + β Xt + Ut.
Yt: - GDP (dependent variable) α: - Intercept.
Xt: - Investment (dependent variable) β: - Slope.
Ut: - Random Error
Time series data for GDP variables at current market prices, and domestic investment expressed in gross capital formation according to the latest available data, were obtained from the Central Bank of Jordan through the annual statistical bulletins for the study period 1985-2016.
Results :
Based on the application of the OLS (Ordinary least squares) method to study the relationship between domestic investment and growth in GDP, we concluded that there is a direct relationship between domestic investment and GDP, as an increase in domestic investment by 1% will lead to growth The GDP is 4.48%, which is consistent with economic theory and the consensus of economists, and the result of the study is in line with the results of previous studies in the case of the Egyptian and Algerian economies, and the Jordanian economy.
Prepared by the researcher using EViews software:
The method of least squares (Ordinary least squares) was used in the analysis as it is the most widely used method in the Standard Model, and (OLS) tries to find the optimal β, α values that make the sum of the squares of these errors the least possible, and the method of least squares is unbiased. Sufficient number of observations, the least squares estimates will be on average correct.
The correlation coefficient came at 0.91, meaning that investment succeeded in explaining 91% of economic growth, and that there is a direct correlation between investment and economic growth. And the zero value of the value of P(Prpb:0.0) that β is significant and statistically significant, and the values of the parameters amounted to -806.2 β: 4.48 α:
GDP = -806.2 + 4.48 INV + U.
Conclusion and recommendations:
The study achieved its goal of measuring the impact of domestic investment on economic growth, and the results of the benchmarking analysis showed that there is a strong impact of investment on growth, as investment explains 91% of economic growth. An investment of 1% will lead to an economic growth of 4.48%.
Based on the results of the analysis, the study recommends the government to encourage local investment; Because of its positive impact on achieving economic growth by directing policies that contribute to improving the investment environment and stimulating local investment, and activating the role of the Ministry of Investment and the Investment Authority by introducing the local investor to the available investment opportunities and demonstrating the economic feasibility of those opportunities, and activating the role of Jordanian embassies and commercial attachés abroad to provide The local investor is given the available export opportunities. The study also recommends the local investor to continue investing as much as possible due to what is reliable in moving the economic wheel.
List of sources and references:
Khatib, Hazem. (2006). Private investment: its determinants and its impact on economic growth in Jordan: an empirical study. Egypt Contemporary Journal, 97 (482), 67-116.
Abbasi, Maroon. (2018). Measuring the relationship between domestic and foreign investment and their impact on economic growth in Turkey 1970-2011. Rafidain Development: Mosul University - College of Administration and Economics, 37 (117), 179-193.
Al-Quran, Anwar. (1997). Public and private investment and economic growth in Jordan. Yarmouk Research Journal, 13 (3), 35-46.
Al-Masaeed, Suleiman. (2008). The Impact of Investment, Financing and Intermediary on Economic Growth: New Findings from the Jordanian Economy. King Saud University Journal - Administrative Sciences, 20 (2), 27-44.
The interview, Suhail and Sameh, Al-Ajlouni. (2016). Determinants of private investment in Jordan using the ARDL model for time series analysis. Administrative Sciences Studies: University of Jordan - Deanship of Scientific Research, 43 (1), 263-274.
Momo, Bilal. (2013). The impact of foreign direct investment and domestic investment on economic growth: a case study of Algeria for the period 1990-2011, a master's thesis submitted to Kasdi Merbah University.
survived, Ali. (2015). The relationship between domestic saving, domestic investment and economic growth in Egypt during the period 1970-2012. Journal of the Faculty of Commerce for Scientific Research: Alexandria University - Faculty of Commerce, 52 (2), 1-33.
websites :
The World Bank, Open Data for the World Bank, Jordan,
https://data.albankaldawli.org/country/JO.
Oman 12/25/2021
Collect and arrange:
Department of Studies and Research
Al-Rakhaa Association for Businessmen