Bilateral Effect of Foreign Direct Investment and Human Resource on Socio-Economic Development of Pakistan

Abstract

The Foreign Direct Investment (FDI) as a package of capital, knowledge and skills has been getting popular for the last three decades among the developed as well as the developing countries. As regards its impact on the socioeconomic development of the host country, many developed and developing countries liberalized their economies and adopted radical policies to attract the FDI. Pakistan is one of such countries that took the FDI oriented stance in late 1980s. Among the multiple determinants of the FDI, the human capital got much importance in the literature with the passage of time. From the other side, the impact of the FDI on the human capital of the host country is also evident in the literature. This bilateral relationship between the human capital and the FDI may result in the socioeconomic development of the host country. The human capital is one of the social indicators and its formation owing to the FDI inflow is the very social development. The FDI may influence the economic development of the host country with the help of capital, payment of taxes, provision of jobs, and improvement in balance of payments. This social and economic development due to the bilateral relationship between the human capital and the FDI is the context dependant one. In the Pakistani context such nexus has not been studied fully. The studies that touched upon it partially are a few also with the conflicting results. This dissertation analyzes this very nexus empirically for Pakistan with the help of using the country level time series data during the period from 1971 to 2005 through four models. First of all it examines the human capital as determinant of the FDI. Then it investigates the impact of the FDI on the human capital. At the third stage it explores as to how FDI inflow influences the economic development in Pakistan. Finally, it studies the impact of the human capital on the economic development of Pakistan. This study also analyzes the trend and the pattern of the FDI flow in Pakistan and theoretically it identified the factors impeding the FDI xinflow. As for the data analysis, the bound testing approach to the cointegration within the framework of the Autoregressive Distributed Lag (ARDL) was used. The study concludes that: The human capital has a significantly positive impact on the FDI flow in Pakistan; The FDI does not influence the human capital formation at the macro level; The FDI is strongly instrumental in the economic development; and also the human capital leads to economic development of Pakistan. The factors impeding the FDI flow in Pakistan are: the perception among the foreign investors regarding the poor implementation of the policies in Pakistan; the poor law and order situation; the ongoing terrorism; weak economic conditions; the nuclear test of May 1998; inconsistent and short-term policies about investment and industrialization; various types of obstacles for investors regarding approval; comparatively insufficient infrastructure; poor condition of the human capital; and tangled labor laws and the pro-labor policies. On the bases of conclusion, policy implications have been touched upon the attraction of FDI and the formation of the human capital in such a way as may result in the socioeconomic development of Pakistan. Key Words: Foreign Direct Investment Inflow, Human Capital, Socioeconomic Development, Social Development, Economic Development, Domestic Capital, Openness, Labor Growth Rate, Pakistan.