Determinants of disaggregate private investment in an oil based economy: case of Saudi Arabia

Abstract

This dissertation empirically investigates the determinants of Saudi Arabia non-oil private investment in disaggregated form using time series analysis. The main motive behind this work is that such analysis has not been attempted before. The impact of growth of output (aggregate demand), government investment, interest rate, and budget deficit on private investment behavior in construction equipment, transportation equipment, and machinery and equipment type of investment during the period 1969-2001 is examined. The Johansen and Juselius (1990) multivariate cointegration test was used to examine the relationship between private investment in each sector and its determinants. The test results indicate the existence of stable long-term relationships and the empirical results showed that private investment in all three sectors is positively influenced by increase in GDP growth (accelerator effect) and availability of credit to the private sector. Government investment showed a complementary effect on private expenditure for construction equipment and machinery and equipment. On the other hand, it exerted a crowding-out effect on private investment in transportation equipment. Interest rate was negatively related to private investment in the areas of construction equipment and transportation equipment. In the case of budget deficits, that factor has a negative or crowding-out effect, on private expenditure on transportation equipment and machinery and equipment, but showed a positive impact on private investment in construction equipment. The modified Granger Causality test in the Error Correction Model framework suggests bi-directional causality from private investment in construction equipment to change in output and credit available. Unidirectional long-run and short-run causality was found from private investment in this sector to budget deficit. While short-run unidirectional causality was found from interest rate to private investment in construction equipment. In the case of the other two sectors, unidirectional causality was found from private investment in each one to change in output and government investment. This finding is consistent with economic theory, which suggests that private investment induces economic growth wherein changes in private investment have Granger cause effect on change in output.