Foreign direct investment and sectoral growth of Pakistan economy: Evidence from agricultural and industrial sector (1979 to 2009)

Abstract

Weak economies strive hard to attract investments from their stronger counterparts. Foreign direct investment (FDI) is a buzzword in vogue for governments who face scarcity of capital to finance lucrative business projects. This present study is conducted to analyze the role of FDI on sectoral growth of Pakistan economy with special reference to agriculture and Industrial sectors for the period 1979 to 2009. Simultaneous models are developed to capture the joint effects of FDI on the said two sectors. Two Stage Least Square (2SLS) technique is used to estimate the role of FDI on sectoral growth. Augmented Dickey Fuller (ADF) test is used to identify the stationary condition of the variables. The study finds a significant negative impact of FDI on growth of agricultural sector. FDI positively affects the industrial sector but the impact is found to be statistically insignificant. Apart from FDI, a number of other factors like the availability of water for irrigation, public sector development program, and state of technology, growth of industrial sector and growth of service sectors have positive impacts on the growth of agriculture sector. The study confirms significant positive impact of the terms of trade, growth of service sector and growth of real GDP on growth rate of Industrial sector. It seems that exchange rate fluctuations and public sector development programs have suppressed the industrial growth in Pakistan as the study observes a significant negative relationship between them. It appears from the findings that real gross domestic product has contributed to the growth of services sector but surprisingly literacy rate in the country is found to have adversely affected growth patterns in the said sector. With the growth of industry and agriculture, it looks like the services sector has taken some positive influence. In light of the findings, it is recommended that investment friendly public policies are needed to attract more foreign direct investment in Pakistan. These efforts will not only foster growth of the industrial sector but also it will have positive effects on real gross domestic growth and other leading macroeconomic variables. Key words: Foreign direct investment, agriculture, industrial, Pakistan.