Study On The Driving Factors Of Declining FDI Inflows In Pakistan

During the past decades,foreign direct investment(FDI)has become an important driving force for economic growth across the world.FDI is beneficial for both home countries in terms of low production cost and access to foreign markets,and for recipient countries with respect to technology progress and employment opportunity.Developing countries are especially passionate for FDI inflows,as they are facing serious development hurdles,like technological lags,short of R&D resources,low corporate governance standards,production inefficiency,and market imperfections.The extraordinary growth of FDI inflows over the past decades has made it a vital element for economic growth in developing countries.Pakistan is a low-income developing country with convenient geographic location,and the country needs FDI inflows to enhance its economic activities,technology innovations,employment creation and poverty reduction.However,as compared with many other developing countries,FDI inflows of Pakistan declined steeply in recent years,which intensifies the alarming situation of its economy.The present study was designed to investigate the causes of declining FDI inflows in Pakistan,especially those country-specific factors which may influence investment willingness of foreign investors.More concretely,this thesis includes the following contents:First,this thesis expounded the research background and significance of study on the driving forces of FDI inflows,and introduced the research questions,contributions,and structure of this study.Second,this thesis provided a literature review on FDI studies,and surveyed the development of general studies on FDI,specific studies on FDI inflows in Pakistan,and researches on FDI inflows' determinants,respectively.And from the literature review,this thesis showed that it's necessary to analyze country-specific factors for FDI inflows of Pakistan.Third,based on theoretical analysis of FDI determinants and the socio-economic characteristics of Pakistan,this study surveyed potential factors that have significant effects on FDI inflows of Pakistan,including terrorist activities,energy shortage,political instability,financial instability,market size and exchange rate.Fourth,this study investigated the effects of country-specific factors,including terrorist activities,energy shortage,political instability,and financial instability on FDI inflows in Pakistan,using macroeconomic factors as control variables and based on time series data covering the period of 1971-2015.To get efficient results,the characteristics of time series data were examined firstly using GLS-based unit root tests which allow multiple structural breaks in time series.A bound test approach constructed on autoregressive distributed lag(ARDL)model was employed to test the co-integration relationship among variables,and vector error correction model(VECM)was adopted to analyze the direction of causality.The results show that,(1)long-run relationships exist between FDI inflows of Pakistan and country-specific variables including energy shortage,terrorist activities,political instability,and financial instability,as well as between FDI inflows of Pakistan and macroeconomics factors including market size,inflation,and exchange rate.(2)More concretely,the long-run analysis shows that,energy shortage,political instability,and financial instability have significant negative effects on FDI inflows of Pakistan,and the first two are the most prominent factors in restricting FDI inflows of Pakistan.(3)As to other factors,terrorist activities as a whole did not have significant long-term impact on FDI inflows in Pakistan;while market size and exchange rate affected FDI inflows positively.(4)The results of Granger causality test identify that terrorist activities,energy shortage,political instability,financial instability,market size,and exchange rate have feedback effects on FDI inflows in Pakistan for the long run.Fifth,through categorizing terrorist activities into different types,this study further analyzed the impacts of different terrorist activities on FDI inflows of Pakistan,using ARDL and VECM models and based on time series data covering the period of 1971-2016.The results show that,(1)hostage attacks,assassination attacks,bomb attacks and other minor attacks have significant negative influence on FDI inflows in Pakistan in the long run,while armed attacks have insignificant influence on FDI inflows.(2)During the short run,hostage attacks,armed attacks,assassination attacks,bombing attacks showed negative impacts on FDI inflows of Pakistan.(3)The results of Granger causality test show that,FDI inflows,market size,hostage attacks,assassination attacks,armed attacks,bombing attacks,other minor attacks,trade openness,and exchange rate have long run causalities among each other.Sixth,the results from the above analysis were summarized and relevant policy implications were deduced.From the empirical analysis,this study suggests that,(1)the Pakistan government should be politically strong and focuses on enforcement of rules and laws.(2)Financial institutes in Pakistan should perform their duties without any political pressure or influence.(3)Pakistan should establish new power plants to overcome the energy crises.The contributions of this study include:(1)country-specific factors of FDI inflows in Pakistan were identified and analyzed for the first time.(2)The impacts of different terrorist activities on FDI inflows in Pakistan were investigated in depth for the first time.(3)This study used the most appropriate methodologies for analyzing the impacts of country-specific variables and macroeconomic variables on FDI inflows.(4)This study will be helpful for the Pakistan government to make appropriate policies for restoring the confidence of foreign investors.