Motives and Determinants of FDI: A VECM Analysis for Oman

The article examines the motives and determinants of foreign direct investment (FDI) in Oman during the period 1980–2013. It investigates the market size, natural resources, inflation rate, trade openness and government expenditures as factors influencing FDI. Cointegration and vector error correction model (VECM) approach are used to identify the short- and long-run dynamics of the FDI determinants. The Johansen cointegration test reveals an existence of long-run relationship among the FDI determinants. This long relationship indicates that FDI flows in Oman are positively influenced by the market size and natural resources, and negatively by inflation rate and degree of openness. The error correction term suggests that approximately 36 per cent of total disequilibrium in FDI flows was being corrected each year. Moreover, Granger causality results show that there is a unidirectional causality running from each of the market size and natural resources to FDI, indicating that flows of FDI into Oman are characterized by market-seeking and resource-seeking motives.