Do Countries Take Away the FDI Share of their Neighbors? Empirical Evidence from the FDI Inflows to Pakistan, China, India and Iran

Abstract

We empirically test whether neighbouring countries compete for and take the FDI inflows of each other. Using time series data for the years 1991-2013, the impact of the FDI inflows to the neighbouring countries of Pakistan (i.e., China, India, and Iran) on the FDI inflows to Pakistan was tested. We found that the FDI inflows to China has a negative impact on the FDI inflows to Pakistan while the FDI inflows to India has a positive impact on the FDI inflows to Pakistan, whereas the impact of FDI inflows to Iran on the FDI inflows to Pakistan is insignificant. Further, trade openness and GDP growth were found to have a significant and positive impact on the FDI inflows to Pakistan. The study also found the existence of long run relationship between the FDI inflows to Pakistan, India, China and Iran. The empirical findings of the study suggest that policies made in isolation based on country specific FDI determinants will have less significant results as compared to policies made on the relative FDI attractiveness score. The ultimate impact of agglomeration of policies will helps in sustaining sustainable economic growth and development as well as improves largely society welfare of the neighbouring countries.