Determinants of investment in Muslim developing countries: an empirical investigation

Determinants of investment in Muslim developing countries: an empirical investigation

Investment has widely been regarded as one of the main driving forces of economic growth. Despite enormous growth potentials and resources, the overall investment rates of most of the Muslim developing countries are relatively lower than those of non-Muslim developing countries. Therefore, this paper attempts to investigate the gross investment behavior in a panel of 21 Muslim developing countries over the period of 1970 to 2002. Fixed Effects estimator is used to capture unobserved country specific effects. 2-Step 1 st Difference Generalized Method of Moments (GMM) dynamic panel estimator is employed to offset endogeneity of the regressors. Granger causality test is performed to see whether reverse causality exists. Robustness of estimated results using WDI (2004) data is checked by re-estimating the models using PWT (6.2) data. Results suggest that the lagged investment, growth rate of per capita real GDP, domestic savings, trade openness and institutional development have positive significant effect on investment. In addition, foreign aid and private sector credit are found to have significant positive impact on investment but not robust. Foreign debt servicing has consistent negative effect on investment. Other variables such as, inflation rate, lending rate, human capital and population growth have been found to have no significant effect on investment. Finally the study recommends that these countries should pursue policies that encourage more domestic resource mobilization reducing dependence on foreign debt and increase per capita real GDP growth, trade openness, domestic savings and institutional development in order to boost gross investment.

Copyright Universiti Putra Malaysia 2009. Permanent restricted access to published version due to publisher copyright policy.