The Impact of Foreign Direct Investment on the Balance of Trade in Jordan (1975-2017)

This study aims to investigate the impact of foreign direct investment on the balance of trade in Jordan over the period (1975-2017). Several diagnostic tests are applied, such as Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests for stationarity. The results show that series are not stationary in their levels all of the time, whereas their first differences are stationary. The Johansen test for co-integration is also carried out. The results of this test show a long-run relationship among the variables. The variables of the vector error correction model (VECM) are: Trade Balance (TB), Foreign Direct Investment (FDI), Real Gross Domestic Product (GDP), Export Volume (X), Volume of Imports (M), and Real Exchange Rate against the U.S dollar (E). The study utilizes two major tools for analysis: Variance Decomposition and Impulse Response Function. The results of the study show that foreign direct investment has a positive impact on the Jordanian balance of trade, and the variations in the foreign direct investment explains about 1.90% of the forecast error of the balance of trade in the second period, and this explanatory power increases to reach about 5.16% in the tenth period. This study recommends that FDI should be directed to the production of goods to replace imports and that free trade agreements be expanded to include new countries from within and outside the region, as these agreements have a positive impact on attracting foreign direct investment. Focus should be given to export in foreign investment promotion campaigns in order to avoid the problem of small size market, which may be considered an obstacle to investment in Jordan, and to continue the approach of economic reform to create the conditions for attracting foreign direct investment to Jordan and attracting foreign capital.