Co – Integration Study in Term of Inward FDI (A Case of India and Pakistan)

Abstract

This paper pursued with the objective of investigating short-term dynamics and equilibrium relations between the two countries in south Asia - India and Pakistan. The main focus of the study is on analyzing patterns of inward Foreign Direct Investment (FDI)in Indian sub-continents. The sample involves yearly time series Foreign Direct Investment (FDI) data from 1980 until 2011. The study employs Engle-Granger Co-integration test, Augmented Dickey- Fuller (ADF) test and Error Correction Modeling (ECM). Empirical results show a significant long-term and the short run relationship between India and Pakistan while to consider India inward FDI as a dependent variable. The finding has one clear implication, that there is a bi-directional relationship involving Foreign Direct Investment (FDI) in India and Pakistan. Analysis of dynamic interactions over post-sample period via impulse response functions and variance decomposition suggest that Pakistan does influence the pattern of Foreign Direct Investment (FDI) inflow in India.