Economic Analysis Of Foreign Direct Investment In Pakistan

Foreign Direct Investment(FDI) has gained much importance in view of globalization and trade liberalization. Meanwhile, there has been a general belief that FDI contributes towards growth augmentation being a dynamic source of capital formation, trade stimulation, technological advancement and human resource development in the host countries. But, empirical studies especially regarding developing countries e.g. Pakistan provide conflicting results of FDI?s impact on economy and it seem to be more dependent on domestic conditions of the host countries.The current study specifies six empirical models i.e. growth, imports, exports, capital formation, labor productivity and agricultural productivity to analyze the first and second round of FDI?s impact on Pakistan?s economy. These models are estimated by employing econometric techniques of Autoregressive Distributed Lag(ARDL) and Vector Error Correction Model(VECM) of Vector Auto-Regression(VAR). The techniques of Granger causality, Forecast Error Variance(FEV) decomposition analysis and Impulse Response Function(IRF) have also been included in the study.The overall results of economic analysis show that the variable included in the models have long term relationship. The presence of bi-directional Granger causality between FDI and GDP, and the results of VECM heavily support the hypotheses of FDI driven growth and growth lead FDI. Meanwhile, the growth level has been found to be sensitive to shocks in its own values. It is also found that FDI and exports are complementary implying that increase in FDI stock encourages the exports and supports the view that FDI would provide greater opportunities to Pakistan in term of access to international markets. The overall results of this study imply that FDI is itself a function of a set of government policies based on investment, profit and taxes. Thus, prevailing export orientation, investment climate and level of economic growth can prejudge future direction of FDI in Pakistan. Moreover, the China Economic Corridor(CPEC) is expected to augment FDI inflows by restoring foreign investors? confidence. However, the impact of FDI towards human capital and growth in agricultural productivity was insignificant implying the lack of preconditions for reaping the spillover benefits of FDI in skill enhancement, and capital intensive direction of FDI in Pakistan.