The Impact of Selected Macroeconomic Variables and FDI on Foreign
Trade in Jordan for the Period (2010-2020)
MOHAMMAD SULIEMAN JARADAT
Department of Banking and Financial Sciences
Ajloun National University
Ajloun, JORDAN
Abstract: Unit Root and Cointegration tests as well as autoregressive distributed lag (ARDL) are used in this
study to assess how selected macroeconomic variables and foreign direct investment (FDI) impact foreign trade
(FT) of Jordan for the period (2010-2020). The automatic (ARDL) (E-view) method was used to assess the
long-run relationship between the variables, represented in GDP, inflation rate (INFR), interest rate (IR), and
FDI as independent variables, and international trade as a dependent variable. Study findings showed a positive
and significant relationship between selected macroeconomic factors and direct investment in foreign
commerce. This suggests that an increase in FDI by 1% results in a (0.13%) increase in foreign commerce
provided that all other conditions remain constant. Gross domestic product (GDP) and foreign trade (FT) have a
statistically significant positive association. The association between inflation rate (INFR), interest rate (IR),
and international trade are negative and statistically significant. According to the data modified R-square
(option R2) amounted to (84.2%), means that independent variables account for (84.2%) of the variation in
GDP shares derived from international trade.
Keywords: Foreign direct investment, foreign trade, gross domestic product, inflation, interest rate
Received: July 7, 2021. Revised: February 18, 2022. Accepted: March 26, 2022. Published: April 8, 2022.
1 Introduction
Foreign commerce is influenced by macroeconomic
conditions and foreign direct investment since they
are linked to economic growth, interest rates,
inflation rate, and unemployment rate in the
environment in which they operate. As a result,
macroeconomic variables and foreign direct
investment are commonly used in fundamentalist
models of the state's general economy, particularly
(foreign trade). Some economic sectors are
somewhat susceptible to these variables, but their
worth is not only dependent on present performance
but also on forecasting how these macroeconomic
variables and foreign investment will be in the
future [1].
This expectation regarding the performance of
future macroeconomic variables is an important
point in the movement of foreign trade because the
amount that can be paid in the future for the risks
assumed at the time of introduction is the most
important factor to consider when evaluating an
investment. Previous performances are not
guaranteed to be duplicated in the future. As a
result, we assume that international trade is tied up
to not just macroeconomic variables but also to
forecasting how these variables will behave in the
future [2].
The strength and efficient capital market allows
the country to access the resources of investors to
invest in their projects. As a result, an efficient
capital market is critical to the country's economic
development, as it allows them to access the
resources of investors for growth and the cultivation
of a stronger economy with an efficient and
successful trade. Economic factors and foreign
direct investment constitute the country's basic
economic activity and the key to the economic
development of numerous countries around the
world, particularly low-income countries [3]
Many developing countries lack capital due to a
lack of national savings, which is reflected primarily
in the gross domestic product. Foreign direct
investment and economic variables is one facet of
international economic interactions, as well as a
component for the development of developing
nations that require it to achieve economic
advancement and scientific and technological
modernization. Most governments have attempted to
develop an acceptable climate to attract direct
investment, on the belief that foreign direct
investment, as well as economic variables, directly
contribute to improving a country's economic status
and foreign trade [4].
Foreign direct investment and economic
variables can help to expand Jordanian foreign trade
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in numerous ways. First, it is regarded as a source of
development financing, and second, it helps to
finance economic investments. Third, in addition to
providing development funds and facilitating
technology transfer, foreign direct investment and
economic factors boost knowledge, managerial
skills, and production efficiency as well as
providing a diverse range of goods and services in
the economy and chances for foreign trade. Foreign
direct investment and economic factors have also
boosted foreign trade, and they may have a
favorable impact on payments [5].
In order to encourage FDI, the majority of
developing nations provide incentives since FDI and
macroeconomic variables are seen as key sources of
finance for investments. According to the report of
United Nations Conference of Trade &
Development (UNCTAD), macroeconomic factors
and FDI flows have expanded faster than global
international trade and GDP. When a company has
access to foreign direct investment, it can easily
grow its industrial activities because it can borrow
money from the international markets, thus resulting
in an increase both in exports from the host country
and economies of scale [6].
Furthermore, local businesses which gain
information from host nations make it available on
FDI enterprises via various organizations. This also
encourages and pushes countries to increase their
output, which is reflected in an increase in foreign
trade and considers an example of secondary
impact. According to policymakers, FDI is
particularly critical to support economic growth EG
in emerging economies and it’s expected to provide
new job openings, advance technical progress in
host countries, and to improve the country's overall
financial situation [7].
Complete economic openness and dependence
on certain macroeconomic indicators constitute
some of the fundamental pillars of the Jordanian
overall economic policy. The Jordanian economy
will move from previous stage, which concentrated
on protection as well as government support to the
current stage based on liberalizing the economy and
boosting productivity, which considers a
competitive advantage for the private sector and a
progress in foreign commerce. As a number of
agreements were signed and successive Jordanian
administrations made attempts to improve the
investment climate by modernizing and introducing
laws, in order to attract international capital. The
policy of reliance on selected macroeconomic
variables was one of the most pressing concerns at
the time and Jordan entered into trade treaties with
the United States, European Union, and Arab
countries. In addition, in 2000 Jordan joined WTO
and signed the Qualifying Industrial Zone Treaty
[8]. The rise in foreign direct investments as well as
indicators, such as GDP, inflation rate INFR,
interest rate IR, and FDI are showing debates about
how these investments impact the host country. The
significance of foreign investment in promoting EQ
has been discussed by numerous researchers, who
deliberated on boosting productivity and
competitiveness by utilizing technologies and
expertise from developed countries. Foreign
investments have unintentional consequences on the
economy by increasing volume of imports, which
frequently related to manufacturing FDI’s inputs. As
a result, potential drawbacks include a trade
imbalance as well as falling of payments balance,
due to profit shifting offshore [9].
The current study showed impact of key
macroeconomic variables and FDI on Jordanian
international trade during the period (2010-2020)
and considers one of a few studies which analyze
the impact of macroeconomic variables and foreign
direct investment FDI on Jordan foreign trade,
which takes an innovative approach to accomplish
its goals. Due to a lack of home funding and savings
spent abroad, rising economies such as Jordan
usually suffers from economic imbalances and
domestic investment (DIS) spending and efficiency,
which frequently causes these countries to seek
external money represented in FDI and expected to
play a significant active role on supporting EG and
improving production capabilities, technology
transfer, and human capital restoration. However,
FDI becomes impediment to economic advancement
because it’s not supplemented by reimbursements
from high-tech breakthroughs, but instead it
concentrated on extractive sectors that aim to utilize
host country resources while minimizing its
engagement in improvement. As a result, this
research will seek to address the following question:
Does rising international trade in Jordan results
from FDI and other macroeconomic factors?
2 Literature Review
[10] Defined macroeconomic variables as a
significant financial, natural, or geopolitical event
that has a broad impact on a regional or national
economy. Macroeconomic variables typically affect
significant parts of the population, rather than just a
few individuals. Such as Economic production,
unemployment rates, and inflation are some of
macroeconomic factors. Governments, businesses,
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and consumers all have a careful eye on these
economic performance indicators. [11] Suggested
that macroeconomic variables have a substantial
impact on foreign trade. When a country's
macroeconomic factors are high, foreign trade
increases as the price of goods and services offered
by that country rises. Rising prices make that
country's goods and services less competitive on the
worldwide market. According to the findings of a
study conducted by [12] on the relationship
between international commerce and some
macroeconomic factors, it was found that excessive
inflation, as well as neglect and weakness in
macroeconomic variables, contribute to reduced
foreign trade.
Gross Domestic Product (GDP) is essentially a
summary of all final products and services generated
within a national economy at any given period.
While researching the relationship between GDP as
an independent variable of macroeconomics and
foreign trade, the analysis discovered that GDP
growth is related to export [13]. The residual test
revealed a permanent link between FDI and GDP,
export volume, GDP, FDI, and foreign trade in [14]
study.
However, due to a paucity of data, the industrial
production index is used as a proxy for national
output in this case study.
This category includes studies on the impact of
various macroeconomic conditions and FDI on
international trade, where several studies in the
economic literature have analyzed the economic
impact of FDI. In addition, diverse researches
conducted to study the FDI impact on foreign trade,
where some studies found positive advantages while
others found negative effects, such as [15] who
claimed that extent of FDI helps on EG may be
determined by the economic and social aspects of
recipient country, and revealed that countries with
high saving rates, open trading systems, and
advanced technology levels would mostly benefit
from additional FDI in their economies. [16]
Explored the link between FDI and Malaysian
production growth and discovered nonexistence of
compelling evidence that link FDI with economic
progress. [17] Conducted a study on the
relationship between FDI and Jordan's economic
development, where findings revealed a substantial
relationship between FDI and productivity as well
as imports and exports. [18] Examined the impact of
FDI entries on Jordan economic over time using the
ARIMA model (2010-2020).
According to the report FDI grew during (2004-
2005) and predicted an encouraging impact of FDI
inflows on macroeconomic indicators. [19]
investigated FDI, workers’ remittances, and its
effects on developing countries EG using panel data
of (1990-2006), and reported a favorable and
significant influence of FDI, remittances, and
official development assistance ODA on EG of
developing countries using system generalized
approach methodologies, and also discovered that
worker remittances boost EG more than FDI and
ODA.
[20] study utilized the export-led growth
hypothesis to inspect FDI influence on non-oil
export performance in Nigeria where statistics
revealed that majority of FDI inflows into the
country’s oil industry, demonstrating the
significance of foreign trade-led development theory
and the interaction between each of FDI, non-oil
exports, and EG. FDI and non-oil exports have a
one-way causal link and research suggested that
encouraging non-oil foreign trade was crucial to the
effectiveness of FDI in Nigeria.
[21] Study investigated FDI and foreign trade
performance at Western Balkan countries (1996-
2013), and examined fixed factors and individuals’
heterogeneity across those countries. According to
the Panel Regression Methods and Least Squares
Dummy Variables (LSDV) Strategies, FDI has a
positive effect on foreign trade performance in the
sample countries across a variety of model
parameters. In addition, [22] looked at long and
short-run links between all of FDI inflows, FT, and
ED in Sri Lanka for the period (1980-2016), where
the study used (ARDL) bounds testing to determine
the relation between variables. According to data,
the inflows of FDI have a positive and significant
relationship on EG in both long and short term
where an increase in FDI will cause GDP to
accelerate. However, in the long run international
commerce has a negative and significant
relationship on EG.
Using a generalized approach strategy for
estimations, [23] confirmed that FDI had a negative
effect on a recipient nation’s growth using cross-
country data (1960-1995) where findings indicated
negative impact of FDI on economies of receiving
countries. According to [24] FDI has a marginal and
negative effect on poor countries' EG, where
researcher contended that ability of receiving
countries to absorb technology determines the flow
of FDI. [25] Stated a negative impact of FDI,
therefore MNCs can be prospered and developed in
mass nations but indigenous enterprises will remain
static. According to [26] who investigated the
correlation between FDI and EG in Pakistan, FI has
a negative impact on EG in Pakistan because
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domestic investment has benefitted the country's
economy.
[27] used data from disaggregated industries to
examine the impact of FDI on China's international
trade performance (1995-2005) and discovered that
FDI inflows had a positive and significant influence
on Chinese exports, while [28], [29], and [30]
discovered that FDI has a positive influence on a
recipient economy's international trade performance.
[31] Studied the relationship between FDI inflows
and international commerce in India (1980-2010)
using vector error correction VEC model and found
a long-term consistent relationship between FDI and
exports while [32] claimed that FDI had little effect
on international trade growth. The analysis of
previous researches showed a concentration of FDI
impact on international trade by employing ARDL
and Extended Method of Moment. However,
researcher discovered only a few studies that
considered FDI to be the most influential factor in
Jordan's foreign commerce. As a result, new studies
about Jordan will be immensely valuable to
literature.
3 Research Methodology
Researcher employed the annual statistics approach
(2010-2020) as well as empirical analysis, where
foreign trade of goods and services; measured by net
export was included in the data series (NEXP),
while secondary data sources include World Bank's
General Statistics Office, World Development
Indicators, UNCTAD, Jordan Statistics Department,
and the Central Bank of Jordan. Researcher also
developed the regression model with
macroeconomic indicators and FDI as the
independent variables, and international trade as the
dependent variable.
A collection of complicated macroeconomic
models was utilized to examine the impact of
selected macroeconomic factors and FDI on
Jordanian international trade. The phenomena have
also been studied using traditional economic
models, FDI models, and a multiple linear
regression model [33], where these models can be
used to calculate the parameter values of
macroeconomic models based on values of other
macroeconomic indicators and FDI indicators that
are independent variables, or on the evolution of
time factor.
The researcher discovers that movement is
consistent with both variables during time period
(2010-2020), as Jordan pursued a Privatization
policy after 2010 and launched the free trade
agreements FTA which result in a substantial
growth in foreign trade and FDI. The 2018 financial
crisis reduced both variables while FDI was
responsive and got affected more than exports after
the year 2018, owing it to Arab Spring implications
and global financial Crisis. Based on Traditional
Economic theory and earlier research, researcher
built a standard model for this study to demonstrate
impact of FDI on Jordan’s foreign trade, and also
agreed on using the Linear Economic Model. This
section looks at how the model specification reflects
the hypothesis proposed in the theoretical
relationship between international commerce and
macroeconomic variables, where functional model
provided below to encompass the study's goal:
Researcher used annual data or empirical
analysis of (2010-2020), where independent
variables included foreign trade data series of goods
and services (G&S) as net exports (NEXP), net FDI
inflows as a proportion of GDP (FDI), GDP, and
inflation and interest rates while foreign trade was
the dependent variable. All data sets were derived
from the World Bank's Development Indicators,
UNCTAD, Department of Statistics in Jordan, and
the JCB. Researcher estimated all variables in
Logarithmic form, where the time profile of exports
( EXP) and FDI as natural logarithm values for
(2010-2020), and also the trajectory of foreign trade
response to the sudden increase in FDI and the
overall economy; which reflects in effects of the
response of this change to shocks in the system, and
foreign trade responds positively in the initial
periods after a shock in FDI as well as the overall
economy, and returns to the level before shock at
the end.
Researcher must determine the link between the
dependent and independent variables determined
using statistical approaches in this analysis:
Correlation used to measures the strength of the
relationship among the variables under
consideration.
Regression explains and predicts the value of one
component in relation to another (s).
Regression seeks to illuminate the link between an
explanatory dependent variable (endogenous, score)
and an independent variable (illustrative, exogenous
predictors).Mathematically, a multiple regression
model (one-factor regression model) is defined. The
relationship was established within the framework
of economic theory, which indicates that economic
reality and investment are the result. The Multiple
Regression Models can be mathematically replicated
and the functional model is provided below to
highlight the study's objective:
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)FDI,IR,INF,GDP(fFT
(1)
Macroeconomic variables, according to the
aforementioned paradigm, can have an impact on
foreign trade. As a result, Equation (1)'s functional
model should be reconstructed as an econometric
model as follows:
tFDI4IR3INF2GDP10aYt
(2)
Where
Yt is foreign trade
GDP is Gross Domestic Product
INF is inflation rate (annual)
IR is interest rate
εt is standard error of extant
Yt represents the independent variable (foreign
trade) while GDP, INF, IR, and FDI are dependent
variables, which correspond to the GDP, inflation
and interest rates, and FDI. Finally, the constant
term, long-term coefficients, and error term are all
denoted by εt; respectively and to begin the
empirical investigation, researchers look at the non-
stationary features of variables. Researchers used
the Augmented Dickey-Fuller (ADF) Unit Root Test
[35] but it’s not covered in this section due to its
wide use in empirical studies and because its well-
known among academics. Readers interested in
these tests will find descriptions and debates in [36],
and if integration orders of variables are the same,
researchers will employ Cointegration tests to see if
it’s Co-integrated. The ARDLBT which was
developed by [37] will be used to analyze the long-
run connection because it beats all other
Cointegration techniques in small samples.
Therefore, researchers will examine the ARDL
estimate findings in the next part.
This stage requires very complex calculations
and a very long time. To make the work of experts
easier, specialized IT applications have been created
which allow the estimation of model parameters and
checking the correctness of results obtained. E-
Views are one of the IT programs used in this
research to solve aspects of Econometrics.
4 Results & Discussion
At the beginning, researcher tested variables of unit
root using ADF unit root test and results are shown
in table (1) below, where at their levels variables are
non-stationary but at first difference stationary since
they are integrated at order one, I (1). In other
words, our variables are non-stationary in terms of
levels but its stationary in terms of first differences
and it adhere to the integration of order one
processes, I (1). Therefore, researcher can now
move on to the Cointegration test because it’s
known that variables are I and I. 1.
To demonstrate the relationship between growth of
FDI and GDP; as major macroeconomic outcome
indicator researcher used a collection of data (2010-
2020) as shown in table (1)
Table (1). Results of ADF unit root test
Variables
Panel B:1st
difference
Results
Actual
value
Net
Export(NEXP)
-7.2658***
I (1)
FDI
-5.6359***
I (1)
IR
-6.2658***
I (1)
INFR
-4.5986***
I (1)
GDP
-1.23659
I (1)
Variables are examined for Long-Run Co-
Movement by employing Pesaran Bounds
Cointegration test, which indicated that variables
have a Cointegration Connection. Means and
variables will move together in the long run and
because variables showed similar integration, it
implies a long-run equilibrium relation between
these variables. Therefore, researcher used ARDL
model to estimate long-term relationship and used
E-Views to analyze the growth of two indicators
throughout time span using graphs and descriptive
data (figure 1). According to the E-Views analysis,
there is a significant linear correlation with an
upward slope between GDP, FDI, and foreign trade.
Based on these factors, we may assume that balance
of international trade, FDI, and total economies
have a strong correlation. Therefore, results of FDI
consider a significant contributor to foreign trade.
Table (2) shows the estimated parameters of
independent and long-term variables are shown
where the following are results of above model.
Researcher found that FDI has a favorable and
statistically significant effect of (5%) level on
foreign trade and according to findings a (1%)
increase in FDI will result in a (13%) increase in
exports. These results align with the rationality of
economic theory as well as the reality of Jordanian
economy throughout study period, which indicates
that foreign trade is increasing and decreasing in the
same direction of FDI. Foreign firms don’t just
invest to supply domestic markets but also to supply
international markets, such as Arab Gulf market.
Study findings comply with findings of other
numerous studies, such as [38], [39], and [40]. The
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Mohammad Sulieman Jaradat
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study of [41] showed a positive impact of foreign
investment on foreign trade’s exports at the Eastern
Balkan countries while the study of [42] showed
positive effect of direct foreign investment on
foreign trade.
Table (2). ARDLBT estimation, and test results
Panel A: ARDL specifications
Specification maximum
lags, ARDL (4,3,3,1)
Cointq = NEXP-
(0.05541FDI+0.265GD
P-4.9822IFNR +
53.42288IR
Specification optimal lags,
ARDL (2,3,3,3):
Cointq= NEXP-
(0.1689FDI+
0.326GDP-
4.5978INFR+33.02691I
R)
Panel B: residuals diagnostics and mis-specification
tests results of ARDL (2,3,3,3)
𝜒𝑆𝐶 2
(2)=0.962[
0.714]
𝜒𝐴𝑅𝐶𝐻
2
(1)=0.20
[0.531]
𝐽𝐵𝑁=1.
007
[0.705]
𝐹𝐹𝐹=
0.92
[0.43]
Panel C: Cointegration test results of ARDL (1,1,1)
Sample F-
Statistic
Signific
ance
Level
Critical Values
Low
Bound
Upper
Bound
FW = 7.26
2%
1.36
2.88
4%
3.95
1.69
8%
2.78
4.5
Panel D: long-run, coefficients from ARDL
Regression
Coefficie
nts
Std.
Errors
T-statistics
NEXP
0.128***
0.10
0.715
FDI
-5.98***
0.19
-2.99
GDP
48.15***
0.20
22.29
IR
20.68***
3.69
18.92
INFR
60.21***
1.87
1.97
Long-run relation, derived from ARDL (2,3,3,3)
NEXP =
+50.00
-0.17FDI
+0.326
GDP
+0.33IR
+4.597
INFR
It noticed from table (2) above that coefficient
and standard errors; *, **, and *** represent
significance levels of 8%, 4%, and 1%; respectively
where SC 2, ARCH 2, and HETR 2 are Chi-squared
statistics used to test the null hypotheses of Non-
Serial Correlation, Non-Autoregressive Conditional
Heteroskedasticity , and Non-Residual
Heteroskedasticity. JBN and FFF stand for Jarque-
Bera and F-Statistics, which used to test the null
hypotheses of normal distribution and Non-
Functional Misspecification, where FW measures
the significance among variables and FW=7.211691
value is bigger than bound i1, which imply that the
absence of a long-term integrative correlation
among variables and a long-term integration are
both rejected at an estimation period of (2010-
2020).
These results come in agreement with economic
theory, where an increase in the value of national
currency; according to the hypothesis will lead to a
reduction in foreign trade by making domestic
commodities more expensive compared with foreign
commodities. Researchers also discovered that GDP
had a positive and statistically significant impact on
foreign commerce at the (2%) level, where a (2%)
rise in GDP will lead to an increase of foreign trade
by (33%). This study can be distinguished by its
utilization of modern methods and the long period it
takes to study relationship between variables, as
well as the employment of numerous diagnostic
tests that ensure the integrity of study statistical
difficulties.
As we have seen, foreign investment and
economic variables have a big impact on foreign
trade, which can be explained by results we have
reached for each country that practice FDI and lead
to an increase in GDP. Based on these factors, we
may conclude that multiple linear regression models
are accurate and suitable for the implementation of
economic investigations.
5 Conclusion
The primary goal of this study was to evaluate the
influence of selected macroeconomic factors and
FDI on Jordanian international trade throughout
(2010-2020), and reached the following
conclusions: the independent variables (FDI, GDP,
inflation rate, interest rate) and the dependent
variable of foreign trade have a long-term shared
integrative connection. In case of Jordan, results
indicate a statistically positive significant
relationship between FDI and foreign trade, which
means that a (1%) increase in FDI will lead to
(13%) upsurge in exports, assuming that influences
of other factors remain constant. There is a
statistically significant positive relationship between
GDP and international FT, where INFR and exports
have a statistical negative significant relationship
which means that a (1%) increase in inflation rate
will reduce international trade by (5.96%). Study
findings revealed an Adj-R2 value of (84.2%), which
indicates that (84.2%) of the variation in GDP
shares of foreign trade is demonstrated by
independent variables.
Some recommendations can be made based on study
findings, which include:
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Mohammad Sulieman Jaradat
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Volume 19, 2022
Improving and developing Jordan’s overall
investment environment as well as repositioning the
country for competitiveness to attract foreign
investments, by achieving production base
expansion and diversification as well as promoting
investment projects registration and licensing.
Nevertheless, incentives and new export markets
should be provided for the local industries.
Additional measures should be taken by the
Jordanian government to promote, market, and
advertise the country’s investment incentives,
benefits, and climate. In addition, there is a need to
develop modern laws that promote investments,
which will help in repositioning Jordan’s
competitiveness to attract foreign and export-
oriented investments that help in training and
rehabilitating local workers.
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E-ISSN: 2224-2899
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DOI: 10.37394/23207.2022.19.90
Mohammad Sulieman Jaradat
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Volume 19, 2022