Al AKHAWAYN UNIVERSITY School of business administration

Final Project:
Factors that impacts the Foreign Direct Investment in Morocco

GBU 3401: Advanced Quantitative Methods in Business

Team Members: Benkirane Hasna Bouzid Reda Idrissi Alami Hicham

Supervised by:
Dr. Ahmed Baijou

Abstract
The FDI which stands for Foreign Direct Investments is a driving force of globalization and an important engine of economic growth. Both developed and developing countries seek to attract FDI due to its many advantages for economic development. FDI can not only bring capital to an economy, but also transfer knowledge, technology, skills, and generate employment and international trade. FDIs perceived ability is to deal with major obstacles such shortages of financial resources, technology, and skills. This has made it the center of attention for policy makers in developing countries such as Morocco. As a matter of fact, Morocco was ranked the third best destination for foreign direct investment (FDI) in the African continent for the 20092010 fiscal years, behind South Africa and Egypt, according to a recent report by FDI Intelligence. The study considered numerous criteria for making such a rank, including infrastructures, local strategies for encouraging FDI, the economic potential, human resources, total labor force, living standards and market openness. There are many factors affecting the FDI but we decided to see the relationship and the impact of only the most significant ones. Our team investigated in searching for the variables that may affect the FDI and since some of these variables are constantly changing and it is possible that one affects more than the others, we decided to choose three major ones. For the data that we used in our analysis, we decided to use secondary ones. Since it is costly and time constraining to collect such huge amount of data we gathered our data from credible sources derived from other research done in the same topic. We chose to use World Bank as the main source for our data.

Contents
Contents..................................................................................................................... 3 Introduction................................................................................................................. 4 Literature review......................................................................................................... 5 Our methodology ................................................................................................................................... 6 Descriptive Statistics...................................................................................................8 Model Summaryb...................................................................................................... 11 1. Coefficients........................................................................................................12 2.Residuals Statistics .............................................................................................................................. 12 Interpretation of the results.......................................................................................13 F Test..................................................................................................................... 13 T Test.....................................................................................................................14 Residual Analysis................................................................................................... 15 Autocorrelation...................................................................................................... 16 Conclusion and Recommendation..............................................................................17

Introduction
Morocco is considered as gateway to Africa, Europe, and the USA. Indeed, Morocco has a strategic geographical location, a long-term political stability, and a considerable labor force capital. Consequently, our country has been attracting more and more foreign direct investments over the last decades. In fact, the latest FDI report ranked Morocco as the third best destination for foreign direct investment (FDI) in Africa behind South Africa and Egypt. In fact, Moroccan FDIs have increased from $500 million to $2.5 billion in only few years; and it is expected that it would reach $3 billion with more investments coming from mainly Europe, USA and UAE. Of course, the attractiveness of Morocco is due to the hard efforts that the country have made over the last past years toward development: a large number of restructuring plans, developments of infrastructures, signature of many free trade exchange agreements, social development programs and social reforms. The majority of the foreign direct investments brought in to Morocco are actually coming from Europe such as the Morocco mall project launched in Casablanca, followed by the Arab countries such as the ARRIBAT project in Rabat . With all what is going around the world our country can no more count on tourism and agriculture only. We need to attract more foreign investors to invest in new sectors like industry. Another issue we are trying to solve is unemployment. It is clear that our country is suffering from unemployment (14%) and bringing new investors will definitely help fighting this problem.

Literature review
We based our research on three academic articles that helped us understand the relationship between FDI and the independent variables that mainly affect its growth. The first article entitled Foreign Direct Investment in Africa: Performance and Potential a report of the United Nations conference on trade and development. It discusses the period of 1990s, where broad macroeconomic reforms have created a favorable investment climate in Morocco. The privatization program and the liberalization of the FDI regime have also contributed to making Morocco a more attractive country to foreign investors. As a result, FDI inflows to Morocco increased from an annual average of $231 million in 19881992 to an average of $562 million in 19931997.in 1997, they amounted to $1.1 billion. Moreover, Morocco has established itself as one of the largest recipients of FDI in Africa and it is at the forefront of changing the image of Africa. The second article entitled the The Determining Factors of Foreign Direct Investment in Morocco written by Jamal BOUOIYOUR, is using an econometric model to investigate the determining factors of foreign direct investment (FDI) in Morocco from 1960 to 2000. During this period Morocco was one of the most important recipients of FDI inflows in the Middle East and North African. This period is characterized by the adoption of the adjustment plan of 1983 - and the accompanying complementary measures relating a more open and flexible economy - that ushered in a radical change in Moroccans strategy of economic development. This article uses an empirical model using some macro-economic variables, such as real exchange rate, labor cost, and human capital (J. Bouoiyour, 2003).

The third article entitled EFFETS DES IDE ET DE LOUVERTURE COMMERCIALE SUR LA CROISSANCE ECONOMIQUE AU MAROC is a research done by Brahim Mansouri. In particular, the paper focuses on the study of the impact on economic growth of foreign direct investment (FDI) and trade openness. It is not limited however to the estimation of the isolated impact of the two variables but proposes to take their interactive effect into consideration.

Our methodology
Our purpose is to determine what the factors that affect Foreign Direct Investment are.

Our population is generated from historical data, going back up to 25 years trying to figure out how the change in the three elements stated before (inflation rate, exchange rate, and labor force) have impacted the FDI. The first few years were before the appearance of the law stating that a foreigner could own a 100% of the capital his company. So we will also make a comparison between before and after this law. However, before concluding any results we will take on consideration the political and economic factors in specific period of times since over the 25 years that we are going to study the country went over many changes. We got all the data from the World Bank and our variables are all numerical so we wont need to use any dummy variable in our project.

Descriptive Statistics

The above graph shows the evolution of the Foreign Direct Investment twenty six years. The number was fluctuating between 0 and 500000000 US $ during the twelve first years. However, in 2002, we can see that this indicator has increased and even doubled. In 2007, the FDI decreased because of the financial crisis which occurred in the same year.

The labor force in Morocco has been increasing during the time. This fact is a good stimulator of the investments since the labor constitutes the most important input to all industries. As a consequence, the FDI increased exponentially over the years.

The inflation rate is fluctuating through time. This change can be explained by the monetary policy of the country which depends also to the economic conjuncture. The graph reveals a deflation in 2000 which cause a raise of the FDI.

The exchange rate of the Dollar against the Dirham varies between 8 and 11 MAD. In 2008, this value went down of 8 DH view the financial crisis. This value is getting higher and higher as the economy recovers.

Descriptive Statistics

Mean FDI

Std. Deviation

6.89545368543E8

9.382055304733E8

25

labor force

9.406089520567E6

1.5949692638681E6

25

Inflation rate

3.80671890094823E0

3.295869838003957E0

25

Exchange rate

9.098224E0

.9202051

25

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Model Summary b

Std. Error of the Model 1 R .828a R Square .685 Adjusted R Square .640 Estimate 5.628649226598E8 Durbin-Watson 1.396

a. Predictors: (Constant), Exchange rate, labor force, Inflation rate b. Dependent Variable: FDI in US $.

ANOVAb
Model 1 Regression Residual Total Sum of Squares 1.447E19 6.653E18 2.113E19 df 3 21 24 Mean Square 4.824E18 3.168E17 F 15.227 Sig. .000a

a. Predictors: (Constant), Exchange rate, labor force, Inflation rate. b. Dependent Variable: FDI in US $.

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1. Coefficients
Standardized Unstandardized Coefficients Model 1 (Constant) labor force Inflation rate Exchange rate B 3.413E8 434.690 2.451E6 -4.121E8 Std. Error 1.573E9 82.763 4.148E7 1.302E8 .739 .009 -.404 Coefficients Beta t .217 5.252 .059 -3.166 Sig. .830 .000 .953 .005

a. Dependent Variable: FDI in US $.

2.Residuals Statistics
Minimum Predicted Value Residual -8.24023744000E8 7.084446720000E8 Std. Predicted Value Std. Residual -1.949 -1.259 Maximum 2.28802329600E9 Mean Std. Deviation N 25

6.89545368543E8 7.765402831760E8

1.281684992000E9 -4.601478576660E-7 5.265119239065E8

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2.058 2.277

.000 .000

1.000 .935

25 25

a. Dependent Variable: FDI in US $.

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Interpretation of the results

R square (r): the r indicates the variation of the dependent variable Y that is caused by the variation of the independent variables. In our case, r equals to 68.5% which means that 68.5% of the variation of the Foreign Direct Investment is caused by the variation of the labor force, the interest rate and the exchange rate. Since our r is higher, we can claim that we have chosen the relevant variables that impact the FDI. Our model: Y (FDI) = 3.413E8 + 434.690 (labor force) + 2.451E6 (inflation rate) - 4.121E8

(exchange rate). Coefficients:

The intercept Bo equal to 341300000 which means that when all our independent variables are equal 0, the FDI will equal to 341300000 US $.

B1 equals to 434.690 which means that when the labor increases by 1, the DFI will increase by 434.690 US $.

B2 equals to 2.451E6 which means that when the inflation rate increase by 1%, the DFI will increase by 2451000 US $.

B3 equal to 4.121E8 which means that when the exchange rate increase by 1%, the FDI will decrease by 412100000 US $ and verse versa.

F Test
Ho: B1=B2=B3=0 (there is no relationship between Y and Xs) H1: at least Bi is different. (at least one independent variable affects Y)
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Using a level of significant of 0.05, the critical value of value, with 3 and 21 d.f, is 3.82. We have Fstat = 15.227 greater than 3.82. So, we reject Ho and we conclude that the independent variables are significantly related to the Foreign Direct Investment. F Test enables to see the overall significance of the model. Our model is significant since we reject Ho.

T Test
Ho: B1=0 (not significant) H1: B1#0 (significant) Using a level of significance of 0.05, the critical value of T with 21 d.f is 2.08. We have T stat=5.25, so we reject Ho and conclude that there is a significant relationship between the FDI and the labor force.

Ho: B3=0 (not significant) H1: B3#0 (significant) Using a level of significance of 0.05, the critical value of T with 21 d.f is 2.08. We have T stat= -3,16 so we reject Ho and conclude that there is a significant relationship between the FDI and the exchange rate.

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Residual Analysis
Linearity

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Normality

Autocorrelation
Ho: residuals are not correlated H1: there are correlated. The Durbin-Watson statistic is equal to 1.396. Dl 1.12 and Du 1.66. We conclude that there is no evidence of positive autocorrelation among the residuals.
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Conclusion and Recommendation

After conducting this analysis in order to dig into the factors that influence the Foreign Direct Investment, we can conclude that our model is significant. In fact, these variables are the most determinants that impact the FDI in all countries, but in Morocco there are other factors that can serve as a multiplier for the Foreign Investment. Among these factors, we can quote the legal environment and security which constitutes a good atmosphere for investors who are looking for profit.

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Years 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Foreign Direct Investment 19975166.86 549182.4961 59574900.78 84661627.57 167056032.1 165122977.8 317462140.6 422470462.5 491466064.6 550924373.9 92386207.52 76412286.35 3568764.494 11869540.22 2651865.405 220739724.5 143838237.3 79160963.95 2312682907 787053819 1619752454 2366000096 2806642141 2466288357

labor force Inflation rate Exchange rate 6812406.58 10.0625 2 8.41856065 6978207.22 9.1044 2 10.31707533 7231215.81 8.3592 5 3.921910351 7392173.02 8.2092 2 5.322001216 7624111.13 8.4882 1 3.960662485 7840946.92 8.2423 5 5.485992299 8009879.20 8.7066 5 6.530240097 8301641.75 8.5379 9 4.437185278 8567819.69 9.2987 2 3.647498691 8711887.21 9.2027 1 1.55796347 9064735.06 8.5402 2 7.954631634 8.7159 9244741.98 1.019425998 9573206.48 9.5271 9 1.959000276 9820381.26 9.6044 9 12.15885272 9.8044 10142097.7 0.814916412 10214546.3 10.6256 8 0.604424519 10097182.0 11.303 9 0.783063654 10239391.2 11.0206 1 1.108716193 10660431.7 9.5744 5 0.730121089 10983914.9 8.868 2 1.017766541 11119757.1 8.865 8 1.465621367 11316964.9 8.7956 1 1.533149743 11578297.3 8.1923 4 3.927440803 11793737.1 5.8643699 7.7503 18

2009

1970323920

7 11832564

1.836230845

8.0571

References:

The World Bank. Retrieved on May 5 th , 2010. From: http://www.worldbank.org/

UNCTAD,1999. Foreign Direct Investment in Africa: Performance and Potential.

Retrieved May 5 th from: http://www.unctad.org/en/docs/poiteiitm15.pdf

J. Bouoiyour. 2003. The Determining Factors of Foreign Direct Investment in Morocco. Retrieved on May 5th , 2010. From: http://www.erf.org.eg/CMS/getFile.php?id=643

N.A. Morocco Newsline. 2009. "African Countries of the Future 2009-2010. Retrieved May 5th, 2010. From: http://www.morocconewsline.com/index.php? option=com_content&task=view&id=387&Itemid=1

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Confrence conomique africaine .2009. EFFETS DES IDE ET DE LOUVERTURE COMMERCIALE SUR LA CROISSANCE ECONOMIQUE AU MAROC. Retrieved May 5 th , 2011
http://www.uneca.org/aec2009/papers/aec2009effetsdes-ide-etde-louverturecommerciale.pdf

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