The Impact Of Fdi On Pakistan’s Economic Growth And Employment-based On Var Model

The objective of this study is to analyze the impact of foreign direct investment on economic growth and employment in Pakistan.The study was focused to analyze the current situation of foreign investment and evaluated the economic variables which effect foreign investment,economic growth and employment by evaluating the role of FDI in establishing the relationship with economic growth and employment in Pakistan.Foreign direct investment is very important to promote economic growth of a country.FDI plays an important in job creation and enhancement of the employment level in a country.Since mid-nineties,FDI inflow to Pakistan has shown marked increase,because Pakistan is experiencing difficulties in creating employment opportunities.There is a need to analyze the role foreign inflow which can play important role to increase economic growth and employment generation.Time series and secondary data was used from 1990 to 2017.The data of GDP(%growth)annual and FDI inflow(% growth)was collected from World development data indicator(WDI).The data on employment(employment to population ratio 15-24,total %)is used from international labor organization(ILO)estimates.For empirical analysis we used VAR models that requires stable variables.Therefore unit root test and AR root test was carried out to evaluate the relevant data of the research either its stationary and evaluate the long run relationship of variables..ADF test and AR root test method was used for FDI,GDP and EMP.The time series of indicators ADF test that FDI and EMP are not stable at 1%threshold level,Then the first order differential was taken which shows that sequence are stable.Among these,DFDI and DEMP are flat and the GDP was stable at 5%.significant level.Therefore,the content analysis of this section was used the DFDI,DGDP and DEMP data to create a VAR model.Using regression results of VAR model,variables relation was explained among each other with their lag values.The results of GDP L1 value shows that GDP positively affect FDI significantly,which indicates that as the growth rate increases,multinational firms have more chance to flourish resulting in the foreign investors increase more investment.The result of FDI LI shows that FDI positively affect FDI significantly which indicates that when FDI inflow increase more,FDI increases,ultimately leading to more chances for foreign investor to invest in host country.The result of EMP L1 also show that employment positively effect FDI significantly which indicates that as FDI inflow increases,employment also increases resulting in more technology and job opportunity for workers.Using GDP as dependent variable,the result of FDI L2 value shows statistically significant results that FDI negatively affect GDP which indicates that when FDI increases GDP decreases.The result of EMP L1 value show that employment positively effect on GDP while results of GDP L1 value shows that GDP positive effect on GDP.Using EMP as dependent variable,the results of GDP L1 value shows positive effect on employment which are statistically significant.The relation between GDP and Employment is positive showing increase in economic growth results in increase in employment opportunity.The result of FDI L1 value show that FDI have positive effect on employment.Similarly,the result of EMP LI value show employment have positive effect on employment.Taking together all results,it has been predicted that the FDI plays a positive role to enhance economic growth and employment in Pakistan.In conclusion,the findings of this study describes that FDI positively affect GDP and employment.By increasing FDI,GDP and employment also increases,therefore the Government should introduce supporting policies for FDI to generate employment resulting in increased GDP.Variance decomposition model analysis the shocks of dynamic changes of FDI,GDP and Employment.The results showed that the fluctuation of FDI is only affected by its own fluctuations in the first period,and the impact of economic growth and employment levels on the fluctuation of FDI(i.e.,the contribution to the forecast error)is only shown in the second period,and this kind of impact on its own FDI is very weak,and it has gradually increased since then.However,from the seventh period,the impact has stabilized at about33.07%.It shows that the impact of economic growth and employment fluctuations on FDI is very weak.The reason for this is due to the fact that there are many macro and micro uncertainties affecting FDI,while the impact of Pakistan’s economic growth and employment on FDI is limited.The economic growth has been affected by volatility and FDI volatility since the first period.It has been relatively strong in the first period due to its own volatility,gradually weakened in the second to third periods,and gradually strengthened by the influence of FDI.This also shows that FDI has a certain lag effect on Pakistan’s economic growth,which is consistent with the conclusions drawn earlier.However,since the fifth period,it has stabilized and stabilized at about 19%.The relative degree of influence is relatively strong,indicating that FDI still has a strong driving effect on Pakistan’s economic growth.There are several studies argue that higher the growth rate,higher foreign investment made.With regard to the number of employed persons,employment has been affected by its own fluctuations and the impact of fluctuations in GDP and FDI since the first period.In the first period,it has been greatly affected by its own fluctuations.This may have a direct relationship with the structure of human capital,that is,it is unlikely to have significant improvement in a short period of time.However,with the continuation of time,the number of employed people in the current period will reduce the impact on employment in subsequent periods.In the first period,the impact of FDI fluctuations on employment has a smaller impact on employment,which is 4.64%,because FDI has a certain lag in time.The impact of FDI fluctuation shocks gradually increased,reaching the maximum(11.81%)in the tenth period.With the continuation of time,the degree of influence has gradually diminished.But basically stable at 11%.This also shows that FDI has an important impact on Pakistan’s employment.