Foreign Private Investment, Institutional Performance and Macroeconomic Management in Pakistan

Abstract

Foreign private investment (FPI) is the favorite domain not only for developed nations but also the developing countries. There were found many theories related to the foreign private investment. The institutional theory of foreign private investment states that institutions of the host country play important role in attracting the inflow of foreign private investment. It is believe that sound institutional performance and better macroeconomic management are keys to attract foreign private investment. The objective of this study was to investigate the impact of institutional performance and macroeconomic management on foreign private investment in Pakistan. To achieve this objective, study used secondary data ranging from 1984 to 2013. The data regarding institutional performance was extracted from International Country Risk Guide (ICRG) website and data regarding macroeconomic management and foreign private investment were extracted from World Development Indicators (WDI) website. The study employed the descriptive statistic, correlation analysis, graphical analysis and stationarity analysis techniques to have primary investigation. To achieve the main objective of the study, firstly the regression analysis was employed to find the impact of explanatory variables on the dependent variable. To study the long run and short run behavior of the variables, study employed the cointegration test, autoregressive distributed lag (ARDL) model and error correction mechanism (ECM). The Granger causality test is also applied in order to investigate the cause and effect relationship among the variables.The study concluded that the better institutional performance has a significant positive impact of foreign private investment inflow in Pakistan. The institutional performance indicators including government stability, investment profile, lowering external conflicts and bureaucratic quality have a significant positive impact on foreign private investment inflow. The study also concluded that the sound macroeconomic management including interest rate, per capita gross domestic product and natural resources has a significant positive impact of foreign private investment inflow. The findings from the cointegration test concluded that the institutional performance and macroeconomic management have a long run co-integrated relationship among them. The findings from the ARDL model concluded that institutional performance, per capita GDP and natural resources have a significant positive long run elasticities affecting foreign private investment. The findings from the error correction mechanism (ECM) concluded that there is a long run convergence ability in the model to create equilibrium in the economy. The findings from the Granger causality analysis concluded that institutional performance, macroeconomic management and foreign private investment have a bi-directional relationship between them. On the basis of findings of the study it is suggested that the government and its institutions concerned to the foreign investment especially board of investment must focus on the institutional performance and macroeconomic management of the country to improve the inflow of FPI. It is also recommended for future research that one can use political, economic and financial risk analysis as well as composite macroeconomic management index for studying inflow of FPI.