A Bounds Testing Approach to Cointegration: Determinants of Foreig Direct Investments Inflows to Yemen

Abstract

Using an econometric model, this paper provide an empirical assessment of the macroeconomic factors that play a major role in influencing Foreign Direct Investment (FDI) inflows to Yemen. Thus, we use a secondary data to analyse the macroeconomic determinants of FDI inflows from 1991 to 2008. During this period Yemen respective governments have paid special attention in improving the business and investment environments. It started by the adaption of a comprehensive economic reform structural adjustment program in 1995, and the accompanying complementary measures relating a more open and flexible economy. The macroeconomic determinants uses in this study are grouped into five categories: market size, cost-related factors, infrastructure, openness of trade, and human capital. The empirical evidence based on the Auto regression Distributed Lag (ARDL) analysis suggests that the most dominant long-run determinant of FDI in Yemen is the infrastructure, and the second important determinant of FDI is exchange rate, while the coefficients of real gross domestic product per capita, openness of trade, and human capital have less impact in the equation of FDI. On the contrary, real gross domestic product growth and interest rate appear to be insignificant in the long-run. Whereas, the positive short-run determinants of FDI in Yemen are real gross domestic product per capita, openness of trade, and infrastructure, and, the negative short-run determinants of FDI in Yemen are exchange rate, and human capital. On the contrary, real gross domestic product growth and interest rate also appear to be insignificant in the short-run.