Does FDI Led Growth Exist in Pakistan Economy?
Al-Barkaat Journal of Finance & Management, 5(1), 62-77
16 Pages Posted: 16 Sep 2013
Date Written: November 12, 2012
The thorough economic literatures present on the role of Foreign Direct Investment in positively affecting the economic growth prove its importance for the development and prosperity of Pakistan. The study aims at identifying the determinants of FDI and studying the FDI-economic growth relationship of Pakistan. The main objective was to identify the significance of the impact of FDIs on GDP growth. The paper also explained the potential opportunities available for investment and the liberalization of policy reforms in order to attract foreign investment in the country. Some light is also shed upon the factors hindering the FDI inflows. Henceforth, this study gathers pertinent data of FDI, economic growth and other variables. The methodology has been divided into three parts. In the first part, an autoregressive model i.e. unit root test of GDP data has been used in order to find whether the time series GDP is non-stationary from the period of 1951-2010. ADF for the time series data is negative i.e. -6.59 as well the test critical values at different confidence levels are negative which shows that the data is non-stationary by applying the difference method. The 2nd part involves the establishment of FDI-GDP growth relationship, and regression model has been used for this purpose. The results show a statistical significance indicating the positive relationship between FDI and GDP growth during the period 1951-2010. This means that the economic growth of Pakistan is indeed impacted and contributed by FDI. The 3rd part identifies the determinants of FDI by using the regression model. The three determinants identified are primarily tariff, rates, openness of trade and portfolio investment. The results indicate a statistically significant (negative) relationship between FDI and tariff rates. Accordingly, there is a statistically significant relationship between FDI and openness of trade; and FDI and portfolio investment.
Keywords: Foreign Direct investment, Economic growth
JEL Classification: C12, C32, F43, O47
Suggested Citation: Suggested Citation