Determining the causality relationships among FDI determinants: evidence from Jordan

Economic theory suggests that FDI reinforced economic growth leading to economic development. The present paper analyses four macroeconomic factors that are affecting FDI inflows in Jordan. However, it examines the long-run and short-run causality relationships among inflation rate (INF), gross domestic product (GDP), broad money supply (M2), exchange rate (EX) and FDI inflows for the (1980-2011) period. It also uses augmented Dickey-Fuller (ADF) and Phillips-Perron (P-P) for testing stationarity; Johansen and Juselious for testing the cointegrating relationships among variables and Engel and Granger for testing the short-run causality relationships among variables. The results suggest that the variables are cointegrated and it shows various causality directions among them. These findings are important for Jordanian policy makers to determine the main macroeconomic factors that may increase FDI inflows to Jordan and reinforce the Jordanian economic growth and development.