The Impact of Financial Development on Domestic Investment: Applied to Jordanian Economy during the Period (1978-2004)

Adnan F. Abo Al-Haija

Abstract


This paper attempts to examine the relationship between financial development and domestic investment in Jordan over the period (1978-2004). It provides an overview of theoretical analyses and arguments regarding the channels through which banking-and stock-market development affect domestic investment.

The results are partially consistent with theoretical underpinnings. The stock-market development indicators are found to have a positive and significant effect on domestic investment, while banking-development indicators do not show any non-negative effect. The last result could be attributed to tight lending policies adopted by Jordanian banks during the period under consideration, and to investors great reliance on personal savings in financing new projects or on internal funds in expanding existing businesses.

This paper also finds that growth rates in real per capita income, do not significantly affect the share of investment expenditures in the GDP, while they do have a magnificent effect on the absolute levels of domestic investment.

The results suggest that new measures should be taken to ease long-term bank loans provided to investors in real sectors and to provide special and widespread credit facilities to participants in Amman Stock Exchange.


Keywords


Domestic investment, Bank-based financial development, Stock-market based financial development, Liquidity indicators, Accelerator theory.

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