The Impact Of Foreign Direct Investment On Economic Growth In Pakistan: An Empirical Study

Recognizing the importance of foreign direct investment(FDI) in economic growth, many countries including Pakistan are constantly working to attract it and hence its demand has become highly competitive. FDI is all the more desired for developing countries as it is seen as a factor of economic development, additional to domestic investment and a source of financing current account deficit.This dissertation aims at delineating and attempts to explain the relationship among foreign direct investment(FDI), economic growth, unemployment, infrastructure and political risk determinants in Pakistan. This dissertation is mainly divided into four parts. The first part investigates the impact of foreign direct investment on economic growth of Pakistan and the second part explores the effects of FDI on unemployment. In the third part, we examine the role of infrastructure in stimulating FDI into Pakistan and finally the fourth part explores the relationship among FDI and political risk determinants in Pakistan. The structure of the dissertation is as follows:Chapter 1 illustrates an overview as well as trends of FDI in the world, South Asia and Pakistan respectively.Chapter 2 presents a brief review of literature in context of economic growth, unemployment, infrastructure and political risk determinants.Chapter 3 investigates the empirical relationship between foreign direct investment inflows and economic growth in Pakistan using time series data from 1972-2012. Two stage-least squares method is used for explaining the relationship between FDI and economic growth. The model includes the following explanatory variables: FDI inflows, trade openness, political instability and terrorist attacks. Results show that FDI plays positive significant role in accelerating growth of Pakistan.Chapter 4 examines the impact of foreign direct investment(FDI) on unemployment in Pakistan observed from 1995 through 2011. The explanatory variables include FDI, corruption, population size and inflation. Results of regression analysis reveal that foreign direct investment decreases unemployment rate in Pakistan.Chapter 5 analyzes the role of infrastructure, particularly with respect to telecommunication in encouraging foreign direct investment(FDI) in Pakistan during 1990-2012. Mobile cellular subscription is taken as a proxy variable for infrastructure along with market size, labor force and trade openness as explanatory variables. Based on the results of Johansen cointegration and ordinary least square estimation method, the findings show a positive significant long run relationship between infrastructure and FDI in Pakistan.Chapter 6 explores the linkage among foreign direct investment and political risk factors in Pakistan during 1996 to 2012. Voice and accountability, political stability and government effectiveness are taken as political determinants of foreign direct investment. Autoregressive distributed lag bound testing approach to cointegration is used in order to examine long run as well as short run relationship between FDI and political risk determinants. The results reveal that all the three variables are highly significant determinants of foreign investment inflows.Chapter 7 sets out main conclusions, summary of findings and policy recommendations of the study.