The Impact of Foreign Direct Investment on Unemployment: Panel Data Approach

Abstract

The purpose of this study was to investigate the impact of foreign direct investment on unemployment in six countries in the Middle East and North Africa, Egypt, Jordan, Lebanon, Morocco, Tunisia, and Turkey, as this region is considered one of the most regions in the world with a high rate of unemployment. The study employed panel data for the period from 1990 to 2018, where three economic models were used to examine the impact of FDI on unemployment, male unemployment, and female unemployment, in the long run, using the Fixed Effect Model (FEM) and Random Effect Model (REM), in addition to finding the causal relationship in the short term using Panel VAR (Granger causality tests). The results showed that FDI reduces the unemployment rate, the male unemployment rate, and the female unemployment rate in the long run. The results of the study also revealed that there is no causal relationship in the short term between FDI and unemployment in its various forms, while there is a bidirectional causal relationship between FDI and exports according to the three economic models. This paper is the first of its kind in terms of examining the effect of FDI on unemployment in the six countries as a grouped and a sample of the MENA region.

“Trilogy” of FDI, Export, and Remittances: An Empirical Study on Jordan’s Economic Development

“…Whenever the proportion of foreign direct investment in GDP increases by one unit, the level of unemployment in Jordan decreases by 0.002 units, this result is consistent with many economic theories that support the impact of foreign direct investment in increasing economic growth, qualifying human capital, increasing exports, reducing unemployment, and transferring technology from abroad. This result is also consistent with many previous studies, such as the study of Mukhtarov et al (2019), which showed the positive impact of foreign direct investment on Jordanian exports, as well as the study of Alalawneh & Nessa (2020), which showed that foreign direct investment reduces unemployment in the Middle East and North African countries.…”

“…The results of the study showed that foreign direct investment increases economic growth in the long run. And also the study of (Alalawneh & Nessa, 2020), which relied on cross-sectional data for six countries in the Middle East and North Africa, as the study focused on investigating the relationship between foreign direct investment, exports, unemployment, and inflation in the short and long term and showed The results of the study show that both foreign direct investment and exports reduce unemployment in the long run and that there is a bidirectional causal relationship between exports and foreign direct investment in the short term.…”

“…One of the most important challenges that hinders economic development in Jordan is unemployment (Alalawneh & Nessa, 2020). The unemployment rate in Jordan reached 18% in 2018 and rose to 20% in 2020.…”

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“…Several economic theories and studies have tried to explain the concept of unemployment, its determinants and consequences and how to reduce it. Whiles the Classical and Neo-Classical theories recognise only voluntary and frictional unemployment, the modern theories argued that unemployment is as a result of imperfections in the labour market (Felbermayr et al, 2011) as cited in Mustafa and Azizun (2020). The study of the relationship between unemployment and foreign direct investment (FDI) is so an important topic in the economic literature and to policy decision makers, more especially in Sub-Saharan Africa where FDI inflows hit a record high of USD83 billion in 2021 and USD 2.6 billion to Ghana in the same year (World Investment Report, 2022).…”

“…The study of the relationship between unemployment and foreign direct investment (FDI) is so an important topic in the economic literature and to policy decision makers, more especially in Sub-Saharan Africa where FDI inflows hit a record high of USD83 billion in 2021 and USD 2.6 billion to Ghana in the same year (World Investment Report, 2022). More so, it is hypothesised that FDI will increase government investment spending through increases in state tax-revenue, seasonal unemployment stabilization, and the generation of intensive-labour projects which are characterised by the use of contemporary technology and therefore the creation and diversity of new work prospects (Mustafa and Azizun, 2020). Several governments in Ghana since independence have tried reducing unemployment challenges in the country at one time or the other by focusing on economic growth and assuming that higher economic growth will lead to higher employment rate.…”