The Jordanian Economy and
Foreign Direct Investment
By:
Prof. Talib M. Awad
Department of Business Economics
Faculty of Business Administration
University of Jordan
Prepared during the Author’s Sabbatical for the
Academic Year 2005/2006, Granted
By the University of Jordan.
20 September, 2006.
0
Table of Contents
item
page
Abstract
2
Introduction
4
World FDI’s flows
4
Arab FDI flows
6
Intra-Arab FDI
8
Jordan Economy and FDI’ s Experience
10
Market structure
12
Investment environment
12
Privatization & liberalization
13
Recent economic trends
13
FDI in Jordan
14
FDI instability
16
Growth Theory and FDI
17
Extended Growth Model
18
Empirical evidence
20
Domestic and Regional Obstacles to FDI
21
Attracting FDI
22
Summary and Conclusions
25
References
29
1
Abstract
Growth of FDI slowed down to negative rates during the years 2001-2003 and recovered into
positive rates starting 2004. The share of developing countries was about 31% of total FDI inflows in
2003. It was heavily concentrated in Asia (62%) and Latin America (29%). The five principal
recipients of FDI accounted for about 52% of all inflows to developing countries (31% for China, 8%
for Hong Kong, 6.6% for Singapore, and 6.3 % for each Mexico and Brazil.
FDI flows to Arab region were modest and unstable. The highest FDI inflows to the region occurred in
2004 reaching to $11 877 million which made only 1.8 % of total world FDI. Intra Arab FDI is largely
driven by oil-based surplus capital and remittances on the one hand, and fundamentals and relations on
the other hand. It showed positive trend during the period and composed roughly about one third of
aggregate FDI to the region. Compared to world FDI intra-Arab FDI was more stable. Most intra-Arab
FDI went to Lebanon, Saudi Arabia, Sudan, UAE, Tunisia, and Egypt, respectively. In contrast most
Arab FDI is exported by oil countries particularly Saudi Arabia, Kuwait, and UAE, respectively.
Unexpectedly, Jordan followed by Syria came next after oil rich countries in terms of FDI exports to
Arab countries. Most intra-Arab FDI absorbed in the service sector.
Jordan has worked very hard over the last five years in order to improve and modernize the investment
and FDI's environment: passing a new Privatization Law to enhance the privatization process,
enactment of legislation harmonizing General Sales Tax (GST) rates on domestic and imported goods,
amending the customs law, the passage of a new laws on intellectual property and competition,
modernization of judiciary systems and commercial courts. Although major economic indicators of
economic growth and per capita income showed continuous improvements over the last seven years,
trade balance deficit, government budget deficit, and inflation are worsening over the last two years.
FDI inflows to Jordan were modest and characterized by high degree of volatility during the study
period. It only amounted to annual average of $67 million during the period 1992-1997, and fluctuated
between $64 million and $801 million thereafter. Its share of total Arab FDI fluctuated between about
1% and 5.2% during the period.
According to UNCTAD Jordan was among the largest gainer in terms of inward FDI performance
index. Although Jordan ha very good potential in FDI, previous FDI’s performance can be described to
be both modest and relatively unstable. Empirical evidence provided by this study indicated to more
important role of labor and exports as compared to capital (domestic and foreign) in the growth of
Jordanian economy. This raise an important question concerning the efficiency of investment spending
and it is channeled into the economy, and raise the validity issue of the domestic investment policies.
Many obstacles are potentially responsible for the short supply of FDI investments in the area. These
include the conflict and instability in the area; unpredictable macro-economic conditions and wrong
public policy in some countries; weak institutions and high administrative barriers; inadequate
2
infrastructure; underdeveloped financial sector; and inadequate availability of a skilled and flexible
labor force. The uncertainty caused by the looming war on Iraq in 2002 and the continuing Israeli
aggression against the Palestinian territories have reduced investors' confidence and posed additional
obstacles to sustained FDI flows.
To attract further FDI 's countries of the region need, among other things, to deepen their financial
market, improve the quality of government and eliminate red tape and corruption in the region. This
would have the effect of creating more transparency, introducing more liberal economic laws, cut down
bureaucratic procedure and provide better management. Additionally, broadening and intensifying the
process of privatization is a necessary step toward raising domestic productivity and attracting more
FDI.to the region.
Furthermore, Arab countries must pay attention to the issue of trade-off between FDI‘s incentives and
the performance requirements imposed on FDI. Incentives found to be costly over a period of time.
Incentives particularly specific type, found to be of less importance for FDI when compared to
macroeconomic fundamentals as market size, stability, and growth. Incentives seem to affect mainly
footloose FDI, or at best lead to relocation of FDI within a region.
Improvements in competitiveness of the host economy are becoming an effective tool for FDI
promotion. In the most effective FDI promotion agencies, efforts are increasingly targeted by activity
and investor, with detailed follow up services and surveys on investor perceptions and satisfaction.
Most importantly, countries that wish to attract more FDI, must increase their productivity level
relative to other countries and hence reduce their relative production cost.
Finally, attention must be paid to further enhance both inter Arab FDI and inter world FDI through
deepening bilateral and regional economic integration. Since none of the Arab countries are endowed
with sufficiently large domestic markets, promotion of regional economic integration will help pave the
way for greater inter-Arab regional investment flows to complement international FDI inflows.
Moreover, the integration of Arab countries into world markets is crucial to attract more FDI.
Establishing market access abroad is increasingly becoming an important incentive for export-oriented
FDI projects.
3
The Jordanian Economy
And Foreign Direct Investment
Taleb M. Awad*
Introduction
In international finance, foreign direct investment (FDI) is defined as capital
provided by an overseas investor to an enterprise or project in another country with
the purpose of acquiring long-term interest in the venture. FDI can be a useful
instrument for economic growth. This is especially essential for developing countries
because it may helps bring in capital, technology and other skills to facilitate higher
levels of productivity. However, the efficiency and growth effects of FDI were subject
to deep disagreement among economists and still remain unsettled issue. The aim of
this paper is to explore and analyze FDI’s experience of the Arab region with
particular emphasis on the case of Jordan. Annual time series data will be used to
asses the importance and development of both enter and intra FDI flows to the region.
Also the relationship between FDI and economic growth will be investigated in order
to asses FDI contribution to some economies of the region. The analysis starts general
with World FDI’s flows, followed by the Arab region flows and then end with Jordan
FDI’s experience.
World FDI’s flows
Globalization has contributed to rapid expansion of world FDI flows during the
period 1990-2004. As Table (1) shows, FDI inflows increased from $208 billion in
1990 to $648 billion in 2004. Likewise FDI outflows increased from $239 billion to
$730 billion during the same period. However, growth of FDI flows changed to
negative during 2001-2003 as shown in Table (1): annual growth rate of FDI inflows
decreased by 40.9%, 13.3%, and 11.7% during the years 2001, 2002, and 2003,
respectively.
*Professor of Economics, Department of Business Economics, University of Jordan.
4
However, in 2004 the FDI inflows turned back into positive modest growth of 2.5%.
FDI outflows showed a similar growth pattern during the same period. According to
UNCTAD slow economic growth and dim prospects of recovery, lower corporate
profitability, and slow down of privatization are among the factors responsible for the
continuous fall of FDI flows during the last three years. The fall of FDI flows during
the last three years came mainly at the expense of US and to less extent central and
Eastern Europe.
Table (1): World FDI flows, 1990-2004.
Item
FDI inflows
FDI outflows
Nominal value
$Billion
1990
2004
208
239
648
730
Annual growth rate (%)
19912000
30.45
26.35
2001
2002
2003
2004
-40.9
-40.0
-13.3
-12.3
-11.7
-5.4
2.5
18.4
8.2
19.1
11.5
11.0
19.8
11.5
FDI inward
1769
8902
13.4
7.1
stock
FDI outward
1785
9732
13.25 6.8
stock
Source: UNCTAD, World investment report, 2005.
World FDI inward stock increased from $1769 billion in 1990 to $8902 billion in
2004, maintaining a persistent positive growth rates during the period fluctuating
between 7.1% and 19.1% in 2003. World FDI outward stock increased from $1785
billion in 1990 to $9732 billion in 2004, showing similar growth pattern to that of
inward stock.
As Table (2) shows, FDI inflows to developing countries increased from $186626
million dollars in 1998 to $233227 million dollars in 2004, the share of developing
countries has increased to 36% of total FDI inflows in 2004, compared to a share of
27% for the year 1998. The lowest share of FDI inflows to developing countries was
18% in 2000. However FDI’s share has increased continuously since after. Within the
developing world, FDI was heavily concentrated in Asia (62% in 2003) and Latin
America (29% in 2003). The five principal recipients of FDI accounted for about 52%
of all inflows to developing countries (31% for China, 8% for Hong Kong, 6.6% for
Singapore, and 6.3 % for each Mexico and Brazil).
5
Table (2): FDI's inflows for selected regions/countries, 1992-2004, million dollars.
Host
1998
1999
2000
2001
2002
2003
2004
Region/Cou
ntry
World
Developed
countries
Developing
countries
Arab
countries
GCC's
North
Africa Arab
countries
Other Arab
countries*
Jordan
1 396
539
1 134
293
81%
253 179
27%
1 092
052
849
052
78%
232
507
21%
5 118
0.7%
1 039
20.3%
2 821
701 124
503 851
825 925
596 305
716 128
547 778
632 599
442 157
648 146
380 022
72%
217 845
76.5%
155 528
70%
166 337
59%
233 227
18%
26.4%
21.7%
26.3%
36.0%
4 104
0.4%
- 184
3 033
6 161
0.4%
383
6.2%
3 412
9 231
1.1%
2 307
25.0%
5 458
7 952
1.1%
2 634
33.1%
3 872
9 549
1.5%
2 411
25.2%
5 262
11 877
1.8%
4 214
35.5%
5 270
55.1%
73.9%
55.4%
59.1%
48.7%
55.1%
44.4%
949
1 096
1 565
1 346
1 382
1 453
1 773
18.5%
26.7%
25.4%
14.6%
17.4%
15.2%
14.9%
310
6.0%
158
3.8%
801
13.0%
120
1.3%
64
0.8%
424
4.4%
72%
186 626
620
5.2%
Source: UNCTAD, World Investment Report, 2005, and the researcher calculations.
Arab FDI flows
FDI flows to Arab region did not fare too well. Indeed, Arab countries have only
been able to attract trivial portion of that great liquidity. The highest FDI inflows into
the Arab region during the study period were recorded in 2004 reaching to $11877
million which made only 1.8 % of total world FDI. During the period, the share of
FDI into the region increased from 0.7%% in 1998 to 1.8% in 2004. Within Arab
countries, the group of GCC's showed a volatile FDI inflows during the period,
turning from a negative value of $184 million in 1998 (mainly due to negative values
of FDI inflows for Saudi Arabia and United Arab Emirates), to a positive value of
$4214 million in 2004. The five principal recipients of FDI accounted for about 65%
of all inflows to Arab countries in 2003 (26.5% for Morocco, 15.7% for Sudan, 8.1%
for Libya, and 7.4 % for Algeria, 6.8% for Tunisia). In contrast, FDI inflows to Jordan
also fluctuated during the period reaching its peak at $801 million in the year 2000
(which was about 13% of total Arab FDI), and falling to $64 million in 2002 (which
6
was slightly less than 1% of total Arab FDI), it then recovered to $620 million in 2004
or about 5.2% of total Arab FDI.
As Table (3) shows, only two Arab countries were within the group of high
performance/high potential FDI: Bahrain and Tunisia are the front runners.
Surprisingly, Algeria and Egypt were categorized within the worst group described as
under performers with low FDI potential.
Table (3): Matrix of inward FDI performance and potential, 2003*.
High FDI potential
High FDI performance
Low FDI performance
Bahrain, Tunisia.
Jordan, Kuwait, Lebanon,
Libyan Arab Jamahiriya,
Saudi Arabia, United Arab
Emirates.
Low FDI potential
Morocco, Sudan, Syrian Algeria, Egypt.
Arab Republic.
Source: Taken from UNCTAD, World investment report, 2005.
* Three-year moving average using data for three years ending with the year in question.
However, most Arab countries were within the group of high FDI potential but have
low FDI performance including Jordan, Kuwait, Lebanon, Libyan Arab Jamahiriya,
Saudi Arabia, and United Arab Emirates. Countries within this group of below
potential, are expected to have better future FDI performance. Morocco, Sudan, and
Syrian Arab Republic, are among the lucky Arab countries that have performed above
their potential.
Intra-Arab FDI
Intra Arab FDI is largely driven by oil-based surplus capital and remittances on the
one hand, and fundamentals and relations on the other hand. Table (4) presents the
development of intra-Arab FDI for each country during the period 1997-2003. IntraArab investment showed a positive trend during the period reaching about $16.8
billion, which was roughly about one third of aggregate FDI to the region. It showed
very limited fluctuations during the period indicating relative stability and reliability.
7
Table (4):Intra-Arab FDI ($ millions) ,1997-2003
1997 1998 1999 2000 2001 2002 2003 total
average Intr-Arab
FDI/GDP1%
Jordan
6
3
14
14
9
12
8
66
9
0.11
UAE
0
380
176
196
215
218
650
1835
262
0.49
Bahrain
0
16
14
0
0
160
192
381
54
0.64
Tunisia
135
290
506
669
56
75
39
1771
253
1.27
Algeria
0
122
86
87
319
54
65
732
105
0.19
Saudi
26
198
82
77
626
625
562
2197
314
0.17
Sudan
143
70
152
331
538
542
391
2166
309
2.13
Syria
328
212
224
191
44
47
39
1084
155
0.90
Oman
19
42
46
0
0
0
0
107
15
0.10
Qatar
0
0
58
61
66
69
10
263
38
0.23
Kuwait
0
0
0
0
0
0
0
0
0
0.00
Lebanon
312
400
500
350
225
650
850
3287
470
2.79
Libya
0
0
0
56
60
58
0
175
25
0.10
Egypt
495
372
258
113
68
79
103
1488
213
0.25
Morocco 48
39
22
22
9
13
672
825
118
0.28
Yemen
10
20
16
68
4
139
126
382
55
0.55
Total
1522 2164 2153 2235 2238 2739 3706 16757 -
Arabia
-
1) Average for 1997-2003 period.
Source: Inter-Arab Investment Guarantee Corporation, investment climate in Arab
countries (2003).
Most intra-Arab FDI went to Lebanon ($3.3 billion), followed by Saudi Arabia ($2.2
billion), Sudan ($2.16 billion), UAE ($1.8 billion), Tunisia ($1.77 billion) and Egypt
($1.5 billion). No Arab FDI flowed to Kuwait, and only $9 million annually on
average flowed to Jordan. In contrast most Arab FDI is exported by oil countries
particularly Saudi Arabia, Kuwait, and UAE, respectively. Unexpectedly, Jordan
8
followed by Syria came next after oil rich countries in terms of FDI exports to Arab
countries *.
According to Bolbol and Fatheldin (2005), most intra-Arab FDI absorbed in the
service sector (52%), followed by the industrial sector (38%).
Table (5) shows that Morocco, Egypt, Algeria, Saudi Arabia, Tunisia, and Sudan
respectively, were hosting the highest shares of FDI. Lowest FDI hosting was
recorded by Yemen, Libya, and Kuwait, respectively. Looking at the ratio of a
country FDI to average total Arab capital flows, the shares were generally modest at
1.8% for Lebanon, followed by 1.2% for each of Saudi Arabia and Sudan. Moreover,
Table (5) shows that the shares of Lebanon, Libya, Saudi Arabia, Sudan, Syria, UAE,
and Yemen in intra-Arab investments are higher than their corresponding shares in
aggregate foreign investments. The opposite is true for the rest of Arab countries. This
can be explained by the fact that general FDI is determined by fundamentals, whereas
intra-Arab investments are mostly determined by factors related to proximity and
relationships. For the Jordanian case, the ratios indicate to relatively less important
intra-Arab FDI compared to aggregate average FDI.
In short the above analysis shows that intra-Arab FDI played a very modest role for
most Arab economies, and perhaps contributed insignificantly in terms of efficiency
and growth since most of it was concentrated in service sector.
*Based on FDI stock data not shown here, published by Inter-Arab Investment Guarantee
Corporation, 2003.
9
Table (5): Selected indicators of FDI (1997-2003)
Average
FDI
country
to
by
average
total FDI
Average
intra-Arab
Average
intra-Arab
FDI by country to
FDI by country to
average total intra-
average
Arab FDI
capital flows
total
Jordan
5.2
0.4
0.0
UAE
3.6
10.9
1.0
Bahrain
5.1
2.3
0.2
Tunisia
9.6
10.6
0.9
Algeria
11.0
4.4
0.4
Saudi Arabia
10.3
13.1
1.2
Sudan
9.3
12.9
1.2
Syria
2.6
6.5
0.6
Oman
1.1
0.6
0.1
Qatar
5.9
1.6
0.1
Kuwait
0.2
0.0
0.0
Lebanon
4.2
19.6
1.8
Libya
0.1
1.0
0.1
Egypt
13.6
8.9
0.8
Morocco
19.5
4.9
0.4
Yemen
-1.2
2.3
0.2
Arab
Source: Inter-Arab Investment Guarantee Corporation, investment climate in Arab
countries (2003).
Jordan Economy and FDI’ s Experience*
This part of the study start by introducing some of the key characteristics of the
Jordanian economy to lay down the ground for further deeper analysis of FDI’s flows
to Jordan and its role in economic growth.
The researcher has benefited from the information about the Jordanian economy published at
the web site of the ministry of foreign affairs shown in references.
10
Market structure
Jordan has a market-oriented free economy, where ownership of business entities is
largely private. The only exception is the public sector's involvement in mining
industries, public utilities, public transportation, rail and air transport. Prices, except
for a few subsidized goods, interest rates and wages are generally determined by
market forces. The performance of the Jordanian economy has been mixed reflecting
Jordan’s vulnerability to exogenous factors like drought and regional developments
arising from a heavy dependence on neighboring countries for trade, aid, and worker
remittances. An external debt burden was alleviated by a number of restructurings
under the auspices of the Paris Club. Over the past ten years, Jordan has made
considerable progress toward achieving macroeconomic stability and in implementing
structural reform; a 20-member economic consultative council works in tandem with
the government to ensure the implementation of an ambitious program of policies
aimed at spurring growth. The large domestic and external imbalances of the late
1980s have been significantly reduced and inflation has been brought under control.
At the same time, entrenched distortions in the economy have been largely eliminated
through the abolition of food subsidies and the liberalization of the exchange and
trade system. Important progress has been made on privatization and in simplifying
and modernizing the regulatory system and the foreign investment code thereby
creating a more investor-friendly environment. Main earners of foreign currency for
the Kingdom are expatriate remittance, exports and tourism. Jordan's economy is
mainly service-oriented. The services sector, which is comprised of financial services,
trade, transportation, communication, tourism, health, and education, contributes
about 70% to the GDP during the period 2000-2003, and employs about two-thirds of
the labor force. The remaining 30% are contributed by the industrial, construction,
and agricultural sectors, respectively.
Investment environment
The investment climate in Jordan is very appealing to investors and provides
many incentives. In 1995, the Investment Promotion Law (IPL) was passed, opening
the economy to business and investment and hence to the creation of wealth. The IPL
offers generous and attractive incentives to domestic and international investors.
11
These include freedom from customs and duties, tax holidays, income tax exemptions,
and unrestricted transfer of capital and profits. Under this law, both Jordanian and
non-Jordanian investors are treated equally. There are many aspects that make Jordan
an ideal base of investment: 1) Its strategic location near Asia, Africa and Europe, 2)
future regional markets, 3) abundance of space and lands, 4) access to foreign
markets, 5) competitive labor costs, 6) conducive investment climate and 7) because it
is part of the MENA region which provides a vital economic power.
Jordan has passed laws and legislations that support private sector activities and FDI
inflows, the most important of which are competition laws, private property and
intellectual property rights laws, modernization of judiciary systems and commercial
courts.
Foreign investors can own up to 50% of any listed public shareholding company,
unless the percentage of the non-Jordanian ownership ratio was more than 50% at the
time of closing of subscription to the shares of the company, in which case the
maximum limit for non-Jordanian ownership will be fixed at that percentage. Annual
dividends are subjected to a 10% tax and capital gains are exempt from tax for both
Jordanians and foreigners investing in Jordan. This has contributed significantly to
Amman Financial Market's (AFM) competitive edge at the regional level.
Privatization & liberalization
The privatization program, one of the centerpieces of the government’s structural
policy agenda, has picked up momentum. Following privatization of Jordan Cement
Factories in late 1998, the Jordan Investment Company (JIC) divested its shares in 10
companies during 1999 and, in the largest privatization to date in Jordan, the
government sold in January 2000 a 40% stake in Jordan Telecommunications
Company (JTC) to a French-led consortium that will play a leading role in the
company’s management. France Telecom, with minority partners National Bank of
Kuwait and Arab Bank paid $508 million. The main focus of the program will now be
on the Royal Jordanian (RJ) airline and the power sector, the National Electric Power
Company (NEPCO). A new Privatization Law, passed by the Lower House of
parliament, would establish a Privatization Council to oversee the privatization
12
process and decide on a use of proceeds, an Executive Privatization Commission, and
a Privatization Proceeds Fund.
In the area of trade liberalization, Jordan joined the WTO on April 11, 2000, and
as part of the accession process committed to undertake reforms, notably enactment of
legislation harmonizing General Sales Tax (GST) rates on domestic and imported
goods, amending the customs law, and passage of a new law on intellectual property.
Jordan has also concluded negotiations with the United States on the creation of a free
trade area agreement. In addition Jordan has signed free trade area and/ or association
agreements with the following countries/regions: EU (2002), EFTA (2001: Iceland,
Liechtenstein, Norway and Switzerland), Singapore (2004), and AFTA (1998: Arab
Free trade area between 17 Arab countries).
It is hoped that such trade liberalizing efforts will foster a move away from Jordan’s
traditional dependence on minerals and tourism toward new opportunities in
pharmaceuticals and information technology.
Recent economic trends
Jordanian economy showed some positive signs of economic improvement over
the last seven years as shown in Table 6. Jordan's GDP (at constant market price)
grew at an average of 6% over the period 2000-2005, although the rate of growth in
real GDP decreased continuously during the period 2000-2003 (from 6% in 2000 to
4.1% in 2003), it rebounded to more than 7% during the last two years (7.7% in 2004
and 7.2% in 2005). In absolute term GDP at current market prices decreased from
about JD6 billion in 2002 to about JD5.77 billion in 2003, and increased to JD9.1
billion in 2005. As the average rate of growth in real GDP (6%) exceeded the growth
rate of population (2.5%), per capita GDP at current market prices slightly increased
from JD1288 in 2001 to JD1526 in 2005 (or in US currency $2200). Inflation
fluctuated during the period from a minimum of negative 0.2% in 2000 (deflation) to
a maxima of 5.3% in 2004. Average interest rate on loans decreased during the period
from 11.4% in 2000 to 7.6% in 2004. The ratio of government deficit to GDP also
decreased from 3.9% in 1999 to 2.7% in 2003 but increased again to 5.2% in 2005,
likewise the ratio of external debit to GDP dropped from 95.5% in 1999 to 55.5% in
2005.
13
Table (6): Basic economic indicators, 1999-2003, million JD.
Indicator
Real GDP
Growth of real GDP %
Nominal GDP
Net factors income
from abroad
Inflation rate %
Weighted Average
interest on loans %
Gov. deficit to GDP %
External debit balance
to GDP %
Merchandise trade
balance
Services trade balance
Terms of trade (price)
%
Ability to import index
%
1999
4854.1
5763.3
-8.7
2000
5144.2
6.0
5989.1
95.5
2001
5469.5
5.3
6363.3
132.8
2002
5833.9
5.7
6778.5
79.8
2003
6287.4
4.1
7203.6
83.9
2004
7060.7
7.7
8164.0
137.7
2005
7818.1
7.2
9118.1
216.1
-
-0.2
11.38
0.8
10.45
0.8
9.85
2.1
8.92
5.3
7.59
4.2
8.1
3.9
95.5
3.4
84.2
3.5
78.1
3.2
78.9
2.7
74.8
2.7
65.5
5.2
55.5
-1323.7
-1898.6
-1423.0
-1227.1
-1415.3
-2395.1
-3556.3
94.7
88.4
-172.5
87.5
-82.2
86.2
-105.9
78.1
-62.8
75.5
-185.3
78.3
113.2
113.9
138.9
157.3
153.2
181.4
183.3
Sources: Central Bank of Jordan, Annual Report, 2003, and Monthly Statistical
Bulletin, May 2006.
The merchandise deficit fluctuated during the period and increased from JD1.3
Billion in 1999 to about JD3.6 Billion in 2005. Likewise the service balance deficit
fluctuated during the period dropping from JD172.5 million in 2001 to JD62.8 million
in 2004 but rebounded to JD185.3 million in 2005. Terms of trade deteriorated
continuously during the period from about 95% in 1999 to about 78% in 2005,
indicating to some improvement to the competitiveness of the Jordan exports during
the period. In spite of this deterioration in terms of trade, the index measuring the
ability to imports increased continuously during the period indicating to enhancement
in the ability of Jordanian economy to imports. This result means that the
deterioration in terms of trade was more than being offset by the growth of exports as
indicated by the quantity index of exports. To summarize, although major economic
indicators of economic growth and per capita income showed continuous
improvements over the last seven years, trade balance deficit, government budget
deficit, and inflation are worsening over the last two years.
FDI in Jordan
As shown in Table (7), FDI inflows to Jordan were modest and fluctuated sharply
during the period 1992-2003, while it amounted to annual average of $67 million
14
during the period 1992-1997, it has increased to highest value of $801 million in 2000
and dropped to lowest value of $64 million in 2002, and then increased to $424
million in 2003, and to $620 million in 2004. Accordingly, the ratio of FDI to gross
capital formation fluctuated between a maximum of 45% in 2000 and a minimum of
3.5% in 2002.
Table (7): Jordanian FDI's inflows, 1992-2003, million dollars.
Item
19921998
1999
2000
2001
2002
1997
Annual
average
310
158
801
120
64
67
FDI's
inflows
Percentage of
gross fixed
capital
formation
3.6
18.5
8.3
45.0
6.9
3.5
2003
2004
424
620
20.1
27.6
Source: UNCTAD, World investment report, 2005.
According to the Jordanian investment promotion authority (2004), about one quarter
of foreign direct investment in Jordan came from Arab countries (mainly from Saudi
Arabia 50%, Egypt 20%, and Iraq at about 10%) and was concentrated in service
sector (Hotels). The other two quarters of FDI in Jordan came equally from Europe
and United States of America and Canada.
In terms of FDI's inward stock (Table 8), it increased continuously during the period
1985-2003, from low $493 million in 1985 to $3501 million in 2004 which make an
average annual rate of growth of only 1%. As percentage of GDP, FDI inward stock
percentage increased from low 9.6% in 1985 to high 31.9% in 2004.
Table (8): Jordanian FDI's inward stock, 1985-2004, million dollars.
Item
1985
1990
1995
2000
2002
2003
493
615
627
2 272
2 456
2 880
FDI
inward
stock
Percentage
of GDP
9.6
15.3
9.2
26.8
Source: UNCTAD, World investment report, 2005.
15
26.3
29.2
2004
3 501
31.9
According to the inward FDI performance index, the ranking of Jordan was the
best among the selected Arab countries during 1998-2001 (ranked 38 out of 140).
However, starting the year 2000 the inward performance index deteriorated
continuously reaching a rank of 84 out of 140 for the period 2001-2003. Surprisingly,
Sudan has moved up to the first rank (29), followed by Morocco (32) and Bahrain
(56). In 2004 the ranking of Jordan has improved to 48, although still surpassed by
both Sudan (18) and Bahrain (27).
Furthermore, according to UNCTAD statistics presented in Table (9), Jordan
(followed by Bahrain) was among the largest gainer in terms of inward FDI
performance index (surpassed only by Tajikistan, Congo, Gabon, and Australia
respectively).
Table (9): Ranking of selected Arab countries according to inward FDI
performance index, 1998-2004*.
Country
1998-2000
1999-2001
2000-2002
2001-2003
38
53
57
84
Jordan
53
64
54
56
Bahrain
96
99
81
67
Qatar
100
56
62
32
Morocco
71
75
60
58
Tunisia
68
60
48
29
Sudan
102
110
113
123
Egypt
Source: UNCTAD, WIR, 2004-2005.
2004
48
27
63
65
67
18
108
* Three-year moving average using data for three years ending with the year in
question, except for 2004.
FDI instability
As shown earlier total FDI’s inflow to Jordan showed high degree of fluctuation
during the period 1992-2003 (Table 7). Indeed FDI instability was chronic issue for
the Jordanian economy during the last three decades. As Table (10) shows, during the
period 1980-2004 FDI inflows fluctuated between a minimum of minus $34 million
(outflows) to a maximum of $801 million. FDI’s instability is evident by the high
value of standard deviation (210), compared to the mean value of 135; a greater value
of standard deviation than the value of the mean of the series is a clear indication of a
potentially high degree of variability. This result should not be confused with the
earlier finding concerning intra-Arab investment stability and reliability. In particular
16
for the Jordanian case, intra-Arab FDI inflows are insignificant compared to foreign
inflows, which implies that FDI coming from outside Arab region is the main source
of instability.
Table 10: Summary statistics of FDI’s inflows to Jordan, 1980-2004.
N
Minimum
Maximum
Mean
Std. Deviation
FDI inflow
25
-34.00
801.00
135.2000
210.01429
Valid N (listwise)
25
In short, although Jordan ha very good potential in FDI, previous FDI’s performance
can be described to be both modest and relatively unstable.
In the next section, we turn into investigating the relationship between FDI and
economic growth; we start with brief theoretical background followed by some
applied empirical analysis of the relationship.
Growth Theory and FDI
Economists tend to differentiate the efficiency effects of FDI depending on the
development strategy option of the economy. For economies following import
substitution strategy (IS), several forms of inefficiencies are introduced including
widespread distortions in factor and product markets due to heavy reliance on tariffs
and quotas, the adoption of production techniques that are incompatible with economy
endowments, and provide widespread incentives for rent seeking and unproductive
profit seeking (Bhagwati, 1994). The inefficiency associated with this trade regime
contributes widening income disparities; and it not only induces misallocation of
resources but also encourages X-inefficiency. It may also produce immiserizing
growth as a consequence of protection induced inflows of FDI into an import
competing industry (Bhagwati, 1973, Brecher and Diaz-Alejandro, 1977).
In contrast the export promotion strategy (EP) allows for free play of market forces
and the allocation of resources on the bases of comparative advantage. Furthermore,
due to its emphasis on neutrality of policy between the import and export sectors of
the economy, it offers none of the incentives for rent seeking which the IS policy
17
provides. The competition it allows for from both international trade and domestic
sources encourages R&D and investment in human capital. Allocation of resources on
basis of comparative advantage and market forces also promotes specialization and
scale economies. In conclusion the new growth theory indicates clearly to the
efficiency of FDI in EP compared to IS countries.
In general, FDI has long been recognized as a major source of technology and knowhow to developing countries. Indeed, it is the ability of FDI to transfer not only
production know-how but also managerial skills that distinguishes it from all other
forms of investment, including portfolio capital and aid. Externalities, or spill-over
effects, have also been recognized as major benefit accruing to host countries from
FDI.
Although new growth theory provides strong potential of FDI as factor promoting
growth, the exploitation of this potential requires a conducive economic climate. In
the absence of such climate FDI may be counterproductive; it may impede rather than
promote growth. It may serve to enhance the private rate of return to investment by
foreign firms while exerting little impact on social rates of return in the recipient
economy. Hence, the previous theoretical analysis suggests that the net effects of FDI
on the growth rate of a particular economy can only be resolved empirically.
Extended Growth Model
A conventional production function, in which FDI is introduced as an input in
addition to labor and domestic capital, is used in this study. As mentioned earlier, FDI
is the prime source of human and new technology to developing countries and this
variable is included in the production function in order to capture the externalities,
learning by watching and spill-over effects associated with FDI. Likewise, exports is
used as an additional factor input into the production function, following the large
number of empirical studies which investigate the export-led growth hypothesis*.
* See Salvatore and Hatcher (1991) for an explanation of the explicit introduction of export into
the production function.
18
Using conventional notation of the Cobb-Douglas type production function:
Y = Lß Kγ Fθ Xφ Tα
(1)
Where:
Y = Gross domestic product (GDP) in real terms,
L = input of labor,
K = domestic capital stock,
F = stock of foreign capital,
X = exports,
T = a time trend, capturing technical progress,
And ß, γ, θ, φ, and α are unknown parameters.
Taking the logarithm of both sides of equation (1) and differencing yields the
following growth model:
y = α + ßl + γ k + θf + φx
(2)
Where lower case letters denote the rate of growth of individual variables, and the
parameters ß, γ, θ, and φ are now output elasticities of labor, domestic capital, foreign
capital, and exports, respectively.
However, due to the well known difficulties in measuring the capital stock especially
in developing countries, we follow numerous previous studies by approximating the
rate of growth of capital stock by the corresponding share of investment (domestic I
and foreign FDI) in GDP (Balasubramanyam, Salisu., and Sapsford , 1996). Hence
our final estimatable growth model is:
y = α + ßl + γ (I/Y) + θ(FDI/Y) + φx + ε
19
(3)
Where: ε is an error term added to the equation. As usual the error term is assumed to
be of white noise type.
Equation (3) represent the final econometric model that can be used to estimate the
influence of FDI, among other variables, on the growth of a single economy using
time series data, and/or the growth of group of economies using cross sectional data.
Empirical evidence
Recognizing the issue of FDI’s data quality especially for developing countries, it is
hoped as it is implicitly assumed by most of empirical studies on FDI, that data
shortcomings are not serious enough to undermine efforts of empirical work. At this
stage model (3) is only applied to available annual time series data covering the
period 1980-2003, for the Jordanian economy. The results of applying Prais-Winsten
estimation method is shown in Table (11):
Table (11): Estimation results*:
Parameters
Std. error
t
Sig.
Labor
0.2
0.041
4.85
0.000
Export
0.16
0.078
2.05
0.05
I/Y
.001
0.004
0.3
0.76
FDI/Y
0.003
0.004
0.57
0.56
Adjusted R-square
0.98
Durbin-Watson
1.52
*The Prais-Winsten estimation method is used to deal the with autocorrelation
problem detected in the initial application of OLS.
The model fit is satisfactory as indicated by the very high vale of adjusted R-square.
Also further econometric diagnostics failed to detect any serious problem of
multicolinearity. Although all the estimated coefficients have the correct expected
signs (positive), only the coefficients of labor and exports are significantly influencing
the growth rate of the Jordanian economy. Surprisingly, the coefficients of both types
of capital (domestic and foreign) turned out to be statistically not different from zero
as indicated by the very low values of the corresponding t-statistics. However, one
20
possible limitation of the results presented in Table (11) is the potential problem of
simultaneous equation bias, which will arise if either the FDI and or exports variable
in model (3) turned out to be endogenously determined. Usually econometricians deal
with this problem by using generalized instrumental variables (Give) method instead
of OLS, which will yield consistent estimators only in large sample. However, the
unavailability of large sample prevents us from exploring this possibility. With this
reservation in mind, we conclude that the empirical evidence provided here indicates
to more important role of labor and exports as compared to capital (domestic and
foreign) in the growth of Jordanian economy.
Domestic and Regional Obstacles to FDI
The main question that come out of this analysis is why Arab countries have
attracted so little of the direct foreign investments experienced by other regions in the
world such as Europe, Latin America, the Caribbean and central Asia?. After all,
these places are subject to economic and political constraints like Arab countries but
have still managed to attract relatively high FDI. As for the Arab world, the following
factors are potentially responsible for the short supply of FDI investments in the area.
These include the conflict and instability in the area; unpredictable macro-economic
conditions and wrong public policy in some countries; weak institutions and high
administrative barriers; inadequate infrastructure; underdeveloped financial sector;
and inadequate availability of a skilled and flexible labor force. It is argued that these
factors produce structural weaknesses in the economies of the region with the result
that many overseas investors shy away from the area. The uncertainty caused by the
looming war on Iraq in 2003 and the continuing Israeli aggression against the
Palestinian territories and against some other Arab countries have reduced investors'
confidence and posed additional obstacles to sustained FDI flows to the region.
21
Attracting FDI
The process of attracting FDI to any country
can well be understood by exploring
policy-economic factors that are potentially affecting the flows of FDI, Diagram (1)
summarizes such factors that are considered by economic theory important
determinants of FDI. They can be classified into three major categories: economic
factors (markets, resources, competitiveness), government policies (macroeconomic
policies, private sector policies, trade and industrial policies, and FDI policies), and
transnational corporation (TNC) strategies (risk perception of host country, strategies
toward location, sourcing, and integration). In addition, Diagram (1) illustrates a two
way relationship between FDI and competitiveness, while FDI can improve host
country competitiveness, the competitiveness of the economy is also one of the most
important factors in attracting more and better quality FDI.
Improvements in competitiveness of the host economy are becoming an effective tool
for FDI promotion. With growing globalization, better information on economic
conditions and convergence of FDI incentives across host countries, the process of
attracting FDI has become more professional and sophisticated. In the most effective
FDI promotion agencies, efforts are increasingly targeted by activity and investor,
with detailed follow up services and surveys on investor perceptions and satisfaction.
Incentives are shifting away from general front loaded benefits such across the board
tax holidays to performance based measures. (UNCTAD, 2003). In the same line
Gorge and Rossell (1985), in a study titled “towards a theory of FDI”, found that
countries that wish to attract more FDI, must increase their productivity level relative
to other countries and hence reduce their relative production cost.
22
Diagram (1): Determinants of FDI inflows.
Markets:
Size, income, urbanization, growth and
stability, access to regional markets, and tastes.
Economic
Factors
Resources:
Natural resources, location
Competitiveness:
Labor prod., cost, skills, and trainability.
Managerial/technical skills, access to inputs,
infrastructure, technology support, financial markets.
Macro policy:
Management of crucial macro variables, ease of
remittance, access to foreign exchange.
Private Sector:
Promotion of private ownership, clear and stable
policies, easy entry/exit, efficient financial
markets, and other support.
Government
Policies
Trade & Industry:
Trade strategy, regional integration and access to
markets, ownership controls, competition policies,
support for SMEs, technology import.
FDI policies:
Entry ease, ownership, incentives, access to inputs,
clear & stable policies.
Risk perception:
Political stability, macro management labor
markets, policy stability.
TNC
Strategies
Location, sourcing, integration:
Company strategies on location, sourcing of
products/inputs, integration of affiliates, strategic
alliances, training, technology transfer.
Source: Adapted from UNCTAD.
23
To further explore the important reciprocal relationship between FDI and national
competitiveness, one can look at the relationship of being as a result of three major
categories of factors that are affecting enterprise competitiveness:
1- Factor markets: it includes technology, skills, supplier clusters…etc.
2- Institutions: ability to provide high quality of education, technology support, and
finance.
3- Incentives: provided by macroeconomic policies, trade regime, industrial policies.
Obviously, these factors included in the above three categories that are determining
enterprise and hence national competitiveness, are the same factors shown affecting
FDI in Diagram (1). However, economists disagree on which of these categories is
more important for FDI. A good survey about the importance of these different factors
to FDI is conducted by Kumar and Pant (2004). Their results indicated to the
justification of performance requirements imposed by developing countries on FDI on
the ground that they are welfare enhancing. The most common type of such
requirements includes minimum exports performance, local contents, intellectual
property rights, and Trade Related Investments Measures (TRIMS). Noticeably
however, developing countries often offer generous incentives to soften the impact of
performance requirements. Such incentives found to be costly over a period of time.
Furthermore, incentives particularly specific type found to be of less importance for
FDI when compared to macroeconomic fundamentals as market size, stability, and
growth. Incentives seem to affect mainly footloose FDI, or at best lead to relocation of
FDI within a region. This later advantage even tends to disappear when countries of
the region compete in granting incentives.
Hence, to attract further FDI 's, in light of the above reciprocal relationship
between competitiveness and FDI flows, it seems that Jordan and the Arab region in
general, need, among other things, to deepen their financial market, improve the
quality of government and eliminate red tape and corruption in the region. This would
have the effect of creating more transparency, introducing more liberal economic
laws,
cut
down
bureaucratic
procedure
and
provide
better
management.
Additionally, broadening and intensifying the process of privatization is a necessary
step toward raising domestic productivity and attracting more FDI.to the region.
24
Furthermore, attention must be paid to further enhance both intra-Arab FDI and
inter world FDI through deepening bilateral and regional economic integration. Since
none of the Arab countries are endowed with sufficiently large domestic markets,
promotion of regional economic integration will help pave the way for greater interArab regional investment flows to complement international FDI inflows. Moreover,
the integration of Arab countries into world markets is crucial to attract more FDI.
Establishing market access abroad is increasingly becoming an important incentive
for export-oriented FDI projects. One example on the effort of integrating to the
world economy, is what is become known in Jordan as Qualifying Industrial Zones
(QIZs), it has created a surge in FDI into Jordan's through providing Jordan with a
privileged access to the United States market for goods produced in those qualifying
zones.
Summary and Conclusions
Growth of FDI slowed down to negative rates during the years 2001-2003 and
recovered into positive rates starting 2004. The share of developing countries was
about 31% of total FDI inflows in 2003. It was heavily concentrated in Asia (62%)
and Latin America (29%). The five principal recipients of FDI accounted for about
52% of all inflows to developing countries (31% for China, 8% for Hong Kong, 6.6%
for Singapore, and 6.3 % for each Mexico and Brazil.
FDI flows to Arab region were modest and unstable. The highest FDI inflows to the
region occurred in 2004 reaching to $11 877 million which made only 1.8 % of total
world FDI. The five principal recipients of FDI accounted for about 65% of all
inflows to Arab countries in 2003 (26.5% for Morocco, 15.7% for Sudan, 8.1% for
Libya, and 7.4 % for Algeria, 6.8% for Tunisia). According to UNCTAD only two
Arab countries were within the group of high performance/high potential FDI:
Bahrain and Tunisia are the front runners. However, most Arab countries were within
the group of high FDI potential but have low FDI performance including Jordan,
which mean that these countries are expected to do better FDI in the future.
25
Intra Arab FDI is largely driven by oil-based surplus capital and remittances on the
one hand, and fundamentals and relations on the other hand. It showed positive trend
during the period and composed roughly about one third of aggregate FDI to the
region. Compared to world FDI intra-Arab FDI was more stable. Most intra-Arab FDI
went to Lebanon, Saudi Arabia, Sudan, UAE, Tunisia, and Egypt, respectively. In
contrast most Arab FDI is exported by oil countries particularly Saudi Arabia,
Kuwait, and UAE, respectively. Unexpectedly, Jordan followed by Syria came next
after oil rich countries in terms of FDI exports to Arab countries. Most intra-Arab FDI
absorbed in the service sector.
Jordan has worked very hard over the last five years in order to improve and
modernize the investment and FDI's environment: passing a new Privatization Law to
enhance the privatization process, enactment of legislation harmonizing General Sales
Tax (GST) rates on domestic and imported goods, amending the customs law, the
passage of a new laws on intellectual property and competition, modernization of
judiciary systems and commercial courts. Although major economic indicators of
economic growth and per capita income showed continuous improvements over the
last seven years, trade balance deficit, government budget deficit, and inflation are
worsening over the last two years.
FDI inflows to Jordan were modest and characterized by high degree of volatility
during the study period. It only amounted to annual average of $67 million during the
period 1992-1997, and fluctuated between $64 million and $801 million thereafter. Its
share of
total Arab FDI fluctuated between about 1% and 5.2% during the period.
According to UNCTAD Jordan was among the largest gainer in terms of inward FDI
performance index. Although Jordan ha very good potential in FDI, previous FDI’s
performance can be described to be both modest and relatively unstable. Empirical
evidence provided by this study indicated to more important role of labor and exports
as compared to capital (domestic and foreign) in the growth of Jordanian economy.
This raise an important question concerning the efficiency of investment spending and
it is channeled into the economy, and raise the appropriateness of the domestic
investment policies.
26
Many factors are potentially responsible for the short supply of FDI investments in
the area. These include the conflict and instability in the area; unpredictable macroeconomic conditions and wrong public policy in some countries; weak institutions
and high administrative barriers; inadequate infrastructure; underdeveloped financial
sector; and inadequate availability of a skilled and flexible labor force. The
uncertainty caused by the looming war on Iraq in 2002 and the continuing Israeli
aggression against the Palestinian territories have reduced investors' confidence and
posed additional obstacles to sustained FDI flows.
To attract further FDI 's Jordan and the Arab region in general, need, among other
things, to deepen their financial market, improve the quality of government and
eliminate red tape and corruption in the region. This would have the effect of creating
more transparency, introducing more liberal economic laws, cut down bureaucratic
procedure and provide better management. Additionally, broadening and intensifying
the process of privatization is a necessary step toward raising domestic productivity
and attracting more FDI.to the region.
Furthermore, Arab countries must pay attention to the issue of trade-off between
FDI‘s incentives and the performance requirements imposed on FDI. Incentives found
to be costly over a period of time. Incentives particularly specific type, found to be of
less importance for FDI when compared to macroeconomic fundamentals as market
size, stability, and growth. Incentives seem to affect mainly footloose FDI, or at best
lead to relocation of FDI within a region.
Improvements in competitiveness of the host economy are becoming an effective tool
for FDI promotion. In the most effective FDI promotion agencies, efforts are
increasingly targeted by activity and investor, with detailed follow up services and
surveys on investor perceptions and satisfaction. Most importantly, countries that
wish to attract more FDI, must increase their productivity level relative to other
countries and hence reduce their relative production cost.
Finally, attention must be paid to further enhance both inter Arab FDI and inter
world FDI through deepening bilateral and regional economic integration. Since none
of the Arab countries are endowed with sufficiently large domestic markets,
promotion of regional economic integration will help pave the way for greater inter-
27
Arab regional investment flows to complement international FDI inflows. Moreover,
the integration of Arab countries into world markets is crucial to attract more FDI.
Establishing market access abroad is increasingly becoming an important incentive
for export-oriented FDI projects.
28
References
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investment: an empirical analysis, Arab Monetary Fund, Abu Dhabi, 2005.
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paper presented at the conference: "intra Arab trade and economic
integration", held at the University of Jordan, Amman, 20-22 September 2004.
3- Bhagwati, J.N. (1994). ‘Free trade: old and new challenges.’ Economic
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4- Bhagwati, J.N. (1973). ‘The theory of immiserizing growth: further
applications’, in International Trade and Money. Toronto: University of
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5- Brecher, R.A. and Diaz-Alejandro, C.F. (1977). ‘Tariffs, foreign capital and
immiseerizing growth.’ Journal of International Economics, vol.7, pp.317-22.
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8- R. Gorge and C. Rossell, “Towards a Theory of FDI”, Oxford Economic
Papers, vol. 37, June 1985.
9- UNCTAD, world invest report, 2002, 2003, 2004, and 2005.
10- Kumar S. and Pant M., (2004).’Incentives for attracting FDI in south Asia: a
survey”, paper presented at UNCTAD Virtual Institute’s Annual Meeting,
Geneva, July 2005.
11- http://vi.unctad.org
12- http://www.mfa.gov.jo/pages.php?menu_id=72
13- Central Bank of Jordan, Annual Report, 2003.
14- Central Bank of Jordan, Various Monthly Bulletins
29