Foreign Direct Investments in Jordan

ABSTRACTInspired by the current literature in the area of foreign investments, this study attempts to understand what firm characteristics attract foreign investors into the Amman Stock Exchange (ASE), and whether foreign ownership enhances the productivity of the manufacturing companies listed on the ASE. The findings show that foreign direct investments pumped into the ASE are more likely to be received by companies with large size, low dividend yield and low liquidity. Furthermore, it is found that when mining and extraction engineering and construction companies are included in the study sample, the productivity of the companies is positively affected by foreign ownership. However, when the sample is composed only of manufacturing companies, it is found that productivity is unaffected by foreign ownership. The latter finding questions the effectiveness of foreign investments channelled through the stock exchange market into the manufacturing sector in Jordan.JEL Classifications: G15, F23, D24Key words: foreign ownership; FDI; productivity; manufacturing companies; ASE(ProQuest: . denotes formulae omitted.)I. INTRODUCTIONForeign direct investment (FDI) is essential for economic growth (Laureti and Postiglione, 2005) and, in particular, foreign capital inflows are vital for the economic development of developing countries (Aggarwal et al., 2005). Foreign equity investment is important for such countries as it enhances the liquidity of the markets and makes firms more globally competitive (Aggarwal et al., 2005) by lowering cost of capital (Bekaert and Harvey, 1997; Aggarwal et al., 2005). Lower cost of capital results in long-term investments by foreign companies, which in turn increases economic growth (Bekaert and Harvey, 1997). Therefore, economic development is driven by equity market development where the latter is enhanced by foreign equity investments (Errunza (2001) cited by Thapa and Poshakwale (2011)). Notwithstanding the above arguments in support of a favourable impact of foreign capital on the economy, Aitken and Harrison (1999) reported that although foreign ownership positively affects Venezuelan manufacturing companies' productivity, especially small companies, it negatively affects domestic companies. In another study, it was found that FDI to the manufacturing sector positively affects the economic growth while there is a negative (no-clear) effect on the primary (service) sector (Alfaro, 2003). Some reveal that for a country to achieve economic growth induced by foreign inflows, its financial system has to attain a certain level of development (Durham, 2004; Azman-Saini et al., 2010; Bekaert and Harvey, 1997; Alfaro et al., 20041; Lee and Chang, 2009). Furthermore, equity portfolio inflow is attracted by highly developed credit markets while FDI inflow requires a lesser degree of development (Sakuragawa and Watanabe, 2010)2. Interestingly, Sakuragawa and Watanabe found that liberalizing the financial markets in the emerging countries brings in FDI, while it reduces equity portfolio investment.On the driving forces of foreign inflows into a country, it was found that foreign investors prefer emerging equity markets that better protect shareholders and investors and employ accounting policies that keep them informed (Aggarwal et al., 2005). In addition, foreign equity portfolio is attracted by more developed equity markets characterised by more efficiency, larger size, lower cost and more liquidity (Thapa and Poshakwale, 2011). For firm-level driving forces, foreign investors prefer firms with better disclosure policies (Aggarwal et al., 2005)3 and firms with larger size, higher turnover rate and lower dividends (Dahlquist and Robertsson, 2001). Dahlquist and Robertsson (2001) argued that turnover rate and dividend policy reflect the importance that foreign investors place on stock liquidity and tax consideration, respectively.In light of the above and to get more understanding of the driving forces of foreign investments and their impact on companies listed on one of the MENA markets, Amman Stock Exchange, this paper addresses two important issues. …