Foreign direct investment in Morocco: Short-term interaction with macroeconomic variables under SVAR

Abstract

Developing countries seek to obtain the means to finance their development projects. Foreign direct investment (FDI) is an essential avenue to achieve this, but the country needs to be attractive, and Morocco is not an exception. In this article, based on annual time series data from 1960 to 2022, we aimed to examine the behavior and interaction of four variables: inward FDI flow to Morocco, Morocco's real gross domestic product (GDP), its gross fixed capital formation (GFCF), and its degree of openness. We opted for a Structural VAR (SVAR) modeling approach, which is able to capture the interactions among time series variables and can rely on the results and foundations of economic analysis and theory. We focused on estimating the short-term SVAR model. We found that real GDP and trade openness have a significant, but negative effect on FDI attractiveness in Morocco, while GFCF has a positive but not significant impact on FDI. These results contradict the majority of empirical literature, which suggests that market size, represented by GDP, openness, and domestic investment, represented by GFCF, are crucial determinants of FDI. Nevertheless, there are studies that align with our findings. This work should be improved by conducting a long-term estimation and considering other macroeconomic variables specific to Morocco in the model.

Keywords: FDI, Attractiveness, Morocco, SVAR

JEL Classification: C22, E47, F21, F62

Paper type: Empirical research