AN ECONOMETRIC INVESTIGATION OF DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN PAKISTAN: (CO-INTEGRATION & ERROR CORRECTION APPROACH)

Abstract

This study examines the various aspects of Foreign Direct Investment (FDI) in Pakistan. This research study is based upon three important empirical areas like major determinants of total FDI in Pakistan, major determinants of foreign direct investment in Services Sector of Pakistan, and Major determinants of FDI in Commodity-Producing sector of Pakistan. Augmented Dickey Fuller (ADF) test was applied to check the stationarity of data and then for estimation, Co-integration and Error Correction Model (ECM) has been used through well-known software, Micro fit (version 4.0). First section of the study examines the overall impact of FDI inflows into the economy of Pakistan, by using annual time series data for the period of 1971-2008. Results indicate that Gross Fixed Capital Formation (GFCF), Degree of Trade Openness (TO) and Inflation rate (INF) are statistically significant with positive signs, whereas Current Account Balance (CAB) is also found statically significant with negative sign. Study also reveals that Debt servicing and Gross Domestic Product found statistically insignificant and it seems that these variables have no significant impact on FDI inflows into Pakistan. Second section of the study examines the key determinants of FDI inflows in Services sector of Pakistan, using time series data (quarterly) for the period of 1996Q 1 -2008Q 4 . This study reveals that GDFCF, INF and PC are found statistically significant with positive signs. CAB and ER are also statistically significant with negative signs. Whereas trade openness (TO) is found statistically insignificant but with negative sign. Third section of the study examines the major economic determinants of FDI inflows in commodity-producing sector of Pakistan, by using time series data (quarterly) covering the period of 1996Q 1 -2008Q 4. This study explores that all these variables are found statistically significant with positive signs. It seems that these variables have significant impact on FDI inflows into Pakistan in commodity-producing sector. Finally, this study concludes that FDI and economic development are part and parcel of each other. So, it is inevitable for Pakistan to boost up economic growth in order to attract FDI and also rationalize investment policies to induce foreign investors in Pakistan. As Pakistan must do more sincere efforts to make it an ideal investment location among South Asian countries, so it is a need of the hour to prove that Pakistan is ideal destination for investment not only in Services sector but it is equally important and attractive location for commodity-producing sector. Although, Pakistan has vibrant areas for investment in commodity-producing sector such as, manufacturing, power and energy, oil and gas, construction, chemicals, fertilizers etc. but for the last few years, most of the FDI inflows have been surged in Service-related sectors. To chuck out this label, GOP should do more efforts to create the image of country as “an important location for investment in commodity-producing sector as well”.