Empirical relationship between Foreign Direct Investment and Economic Variables of Pakistan

Abstract

Economic growth of developing countries primarily depends upon the various socio-economic factors such as level of output, rate of saving and investment, standard of living of people, per capita income as well as national income and finally on industrial development. Pakistan is the second largest economy in the south Asia in terms of market size and availability of cheap labor force, however, failed to attract the surge of FDI inflow in the economy during last two decades. More specifically, the foreign investment comes in Pakistan generally on the basis of relation i.e. Pak –US relationship whose effect can be observed clearly during interval 2000 to 2007. Later, the financial crisis dumped the world economy resultant the developed countries channelize their investment within country to cope up with the worsening effect of financial crisis rather than concentrating on foreign investment. The prime motto behind this study is to observe the challenging effect of FDI inflow on the economy of Pakistan during most impressive period in Pakistan history in terms of foreign investment. In this study the economic growth of Pakistan is being measured by developing the econometric model over various indicators such as GDP, GDPPC, GNI, TOP during clustering period 2000 to 2012.Empirical results shows that the entrance of FDI, however, uplifted the status of GDP whereas another variables are negatively influenced during first interval i,e.2000 to 2006. On the other hand, during second interval of study i.e. 2007 to 2012 the entrance of FDI inflow strongly affected the status of GDP Per Capita, whereas other variables are negatively influenced. At last, despite of favorable investment environment and key macroeconomic fundamentals, the Pakistan is still legging continuously in attacking the large FDI inflow caused to poor infrastructure, terrorist activities, energy issues, distortion in law and orders and large security issues. Key wordsEconomic growth, financial crisis, GDP, GDPPC, GNI, TOP. I. EFFECT OF FOREIGN INVESTMENT ON PAKISTAN ECONOMY In previous two decades, it has been observed that in developing countries the domestic investment generally fails to accomplish the needs of growth and development that could mould the countries scenario to look forward towards alternative source of finance. In general, the developing countries for bridging the gap between demand and supply of funds always welcome the foreign investment. Recently, the FDI has been recognized as a most efficient source of finance for developing countries. It assist the companies not only the availability of funds but also attempts to bridge the technology gap knowledge spillover, human capital and provide competitive business environment (Kalim and Shahbaz, 2009). Pakistan is a young country with an ancient history and with rapidly growing populations. Her economy primarily depends on agriculture, a per capita income is low, and much of the population lives in poverty. In spite of all, Pakistan always fetch the substantial FDI inflow in its economy on behalf of large domestic market and favourable policies environment but terrorist violence, energy and financial crisis create hurdles for investors caused to turbulent trend in foreign investment. Previously, the inconsistent investment policies observed as the major constraints in free flow of FDI until 1991 but the FDI inflow has steadily increased during the early post-liberalization period. More specifically, FDI inflow to Pakistan has increased in many folds during last two decades i.e. US $485 Million in 2001-02 to US $5,409.80 Million in 2007 -08 further declined to US $820.7 Million in 2011-12 (as per UNCTAD „WIR‟ report). However, FDI plays a vital role to acceralate the economic growth of developing IOSR Journal of Business and Management (IOSR-JBM) e-ISSN: 2278-487X, p-ISSN: 2319–7668 Special Issue AETM'16 70 | Page countries (Khan, 2007). It is evident with the study of Pakistan economy, the energy sector, telecom sector and financial sector attracted surge of FDI inflow on behalf of large market share, cheap labour force and vast opportunities. The prospect of this economy reflect that these sector failed to keep up the upward trend of FDI inflow for longer period later 2008 these specific sectors mislead the growth path resultant the investors lose their confidence in Pakistan economy. If we closely analyze, the macroeconomic parameters and opportunities in Pakistan, then realized that the share of foreign direct investment (FDI) inflow is negligible as compared to the absorbing capacity and economic fundamentals of the country. Even though, the share of Pakistan is less than one percent compared to world total FDI inflow. That can be due to political instability, security issues, law and order situation, energy crisis, corruption, lack of required infrastructure, lack of enforcement of contracts and high corporate tax rates. This research paper aim is to analyze the relationship between foreign direct investment (FDI) inflow and economic variables i.e. GDP, GDP PC, GNI, Trade openness in Pakistan for the period 2000 to 2012. The rest of the paper framed as: Section 2 provides the trends of FDI investment in Pakistan. Section 3 provides the previous theoretical studies on FDI investment. In section 4 data sources and econometric methodological is being discussed. Section 5 represents the econometric results and discussion. Finally, the section 6 states the conclusions and recommendation regarding further scope and guidelines for board of investment. II. TRENDS OF FDI INFLOW IN PAKISTAN In Pakistan, FDI is primarily invested through equity capital, re-invested earning and other capital. The FDI Investment continuously follows the regular pattern in Pakistan‟s economy since year 1991 with a view to escalates the economic growth of country. Generally, the foreign investors fetch the funds in many ways in term of FDI investment i.e. launching a new project or acquiring the already existing domestic projects with huge profit potentials (Sajid et al. 2012). The discussion over FDI inflow in Pakistan‟s economy has been substituted in four specific categories, which were further determined on the basis of velocity of FDI inflow in the economy. Actually, the consensus behind this clustering study is to go in depth and searched the causes of slow as well as rapid movement of FDI inflow at different time interval. Fig. 1: Categorical FDI inflow in Pakistan (USD Millions) 0 200 400 600 80