Analyzing the Influence of Exchange Rate Dynamics on Foreign Direct Investment in Pakistan: A 13-Year Analysis

Abstract

Background: In the economic development of Pakistan, Foreign Direct Investment (FDI) plays a crucial role while the exchange rate has been determined as an important factor influencing the FDI inflows. Research Aim: This research paper explores the multifaceted relationship between changes in exchange rate and Foreign Direct Investment (FDI) in Pakistan aiming to shed the light on complex dynamics at play. Methodology: Through the data analysis from 2010 to 2022 and empirical studies this study identifies a significant relationship between the change in exchange rate and FDI. The test of Linear Regression and Pearson’s Correlation were applied to test the data through SPSS software. Results: The results of the correlation exhibited that there is a positive relationship between change in Exchange rate and FDI, while the R-square in the regression analysis showed about 58.1% impact of the independent variable on the dependent variable. It is apparent from the study that the depreciation and appreciation of the Pakistani currency relative to major international currencies affects the decision of the investors. Conclusion: This paper concludes with a set of recommendations for the Government of Pakistan with the aim of creating a conducive environment for Foreign Direct Investment (FDI) by considering stabilizing the exchange rate as a key factor. Further, this research will help provide valuable insight and pathways for the policymakers and investors in forming the decision-making and policy for the development and sustainable growth of the economy of Pakistan.