Corruption, political instability and their impact on investment: An FMOLS approach

Abstract

Due to the lack of studies in the financial literature on indicators of corruption and political instability relative to investment, this paper is considered one of the first studies that examines the impact of two-corruption indicators and political instability on investment in Jordan over the period 1987–2020. Using Fully Modified Ordinary Least Squares (FMOLS) based on annual data, the corruption effect as measured by the corruption score index is a negative and statistically significant impact on investment in Jordan. The second measure of corruption, which is the corruption rank index, confirmed the previous result that corruption has a negative and statistically significant effect. Political instability measured in this study as a dummy variable by wars in the region has a positive and statistically significant effect on investment. For macroeconomic variables, the results show that current government expenditure and interest rate have a negative and significant impact on investment in Jordan. The interest rate factor was the highest coefficient among the negative effects. The study also shows that the investment in Jordan is positively and significantly affected by growth domestic product, imports and local revenue. The gross domestic product showed the highest coefficient among the positive effects. This study concludes that policy makers attempt to apply transparency and minimize the corruption through flexibility, facilitation of procedures and reduced transactions using automation. The study also concludes that decision makers should rationalize current government expenditure and direct banks in Jordan to give greater priority to credit facilities for productive sectors.