Analysing the Dynamic Relationship Between Foreign Direct Investment and Trade Balance

Taleb A. Warrad & Ade S. Nimri

Published: December 2021

The purpose of this article is to examine the dynamic relationship between FDI and the trade balance in Jordan, by using time series data over the period 1975–2020. In it we used two main variables – Jordan’s trade balance (TB) and foreign direct investment net inflows (FDI) – and two sub-variables – Jordan’s official exchange rate (ER) and the taxes Jordan levies on international trade (T). The results show a long-term relationship between these four variables in Jordan. The results also confirm that there is a negative long-term relationship between FDI, T and TB and a positive long-term relationship between ER and TB. In the short term, the findings confirm that no dynamic short-term relationship exists between FDI and TB. However, there is a significant and negative short-term relationship between T and TB and a significant positive short-term relationship between ER and TB.