Enigma of Public Assistance to Private Investment through Infrastructure: Evidence from Pakistan

Abstract

Purpose: Public physical infrastructure development has fairly large impacts on private sector investment decisions and through this; it can affect economic performance (growth). The current study intends to explore the course in which public infrastructure affects private sector investment in Pakistan and whether there exist long run equilibrium between them or not. Time series annual data from 1972 to 2015 has been employed. Instead of using a single infrastructure indicator, the study has constructed a multidimensional composite index through principal component analysis (PCA). Real gross fixed capital formation is used as the proxy of private sector investment. The long run relationship is determined by Johansen's co-integration technique after checking for the order of integration. The empirical evidence shows that physical infrastructure availability is positively and significantly affecting private sector investment decisions. In addition, credit to private sector, per capita GDP, work force and inflation rate are positively and significantly affecting private investment. Further, private investment is sensitive to public physical infrastructure availability not only in long run but also in short run. A statistically significant and negative ECT (-1) term confirms the long run relationship and convergence towards equilibrium in case of Pakistan. Findings of the study show that public physical infrastructure services endorse the private investment both in the long run and the short run