An empirical nexus between exchange rate and China's outward foreign direct investment: Implications for Pakistan under the China Pakistan economic corridor project

Abstract

This study spotlights the determinants of Chinese outward foreign direct investment in Pakistan under the China Pakistan Economic Corridor using time series data. The stationarity was checked through augmented dicky fuller tests, and an auto-regressive distributive lag bounds test confirm long-run association among exchange rate, inflation, corruption, law & order situation, and Chinese outward foreign direct investment. The study conducted auto-regressive distributive lag (ARDL) for the short-run and long-run equilibrium covering annual time series data from 1990 to 2017. The empirical results indicate that exchange rates, inflation, and corruption have a negative and statistically significant effect on China's outward foreign direct investment in the host country. In contrast, law and order situations have an insignificant association with outward foreign direct investment. The findings further demonstrate that the error correction term is negative and highly significant at a 1 % level of significance. This is another indication of a stable long-run association among the variables. The estimated error correction term coefficient is −0.102, recommends that the short-run disequilibrium can be corrected at the speed of 10 %. Moreover, in the short run, corruption, inflation, and law and order are significantly affecting outward foreign direct investment. At the same time, export has no significant impact on outward foreign direct investment in the short run.