A Research On Determinants Of Foreign Direct Investment And Economic Growth In Pakistan

Foreign direct investment is considered an important determinant of economic growth and development by policymakers and academicians around the globe.In addition,FDI enhances employment opportunities and helps in reduction of poverty.Keeping in view it's importance an effort has made in this paper to explore the main determinants of FDI and find out the relationship between FDI and economic growth in Pakistan.In addition,this study also finds out the main determinants of economic growth in Pakistan.The reason behind this research is to analyze their relative importance in the process of growth and attracting FDI in Pakistan.Also,this paper theoretically analyzes the challenges and opportunities of CPEC.It is important to mention here that CPEC is declared as a “Game Changer” for Pakistan by both the governments and policymakers.On the other hand,Pakistan economy is facing severe economic,political and social problems.However,by attracting FDI based on the experience of Chinese economy,these problems can be resolved in coming years.Furthermore,Pakistan possesses a wide range of natural resources which play significant role in development process.In addition,it has geographic,political and strategic importance.The dissertation is based on the empirical analysis conducted by applying time series data from 1980-2015.The augmented Dickey-Fuller & Phillips-Perron tests are employed to ensure stationary of data.The estimation strategy is based on three approaches.First,we use the Johansen Cointegration test,which is followed by the auto regressive distributed lag(ARDL)bounds test to get robust,consistent and unbiased estimates.Furthermore,we have utilized Breusch-Godfrey LM test for detecting the problem of serial correlation and Breusch-Pagan-Godfrey test for Heteroskedasticity.To check the stability of our models,we have applied CUSUM & CUSUM of Square test.In addition,we have tested the short and long run determinants of economic growth(Y)and foreign direct investment(FDI).In particular,this study test the impact of human capital,physical capital,foreign direct investment,trade openness,energy and population growth on economic growth.Also,it analyzes the impact of economic growth,physical capital,human capital,population growth,energy,trade openness,government consumption,and inflation on foreign direct investment.In addition,this shed light on the overview of FDI inflow in Pakistan.The results from Johansen test and ARDL model have demonstrated that human capital,physical capital,foreign direct investment and energy have positive and highly significant impact on the economic growth of Pakistan.However,energy is the important determinant of economic growth as it has greater coefficient followed by human capital,physical capital and FDI.While,trade openness and population growth has in-significant coefficients.Consequently,the FDI-led growth hypothesis is valid for Pakistan.Similarly,human capital and physical capital are the important determinants of economic growth.The results from second model have showed that economic growth,physical capital,human capital,population growth,energy and trade openness have positive and highly significant impact on economic growth.However,government consumption and inflation have negative and significant effect on FDI.The results have shown that economic growth stimulates FDI inflows more than that of FDI stimulates economic growth.Therefore,this study suggests that more focus should be on attracting foreign direct investment on one hand,on the other hand,growth oriented policies are required.Lastly,the other influential factors for FDI and economic growth in Pakistan are;energy,physical and human capital.