Impact of foreign direct investment on the exports of five major sectors of Pakistan’s economy: A governance perspective

Abstract

This study investigates and analyses empirically the impact of Foreign Direct Investment (FDI) inflows on the exports for a panel series of five large-scale manufacturing industries of Pakistan during the period 2000-2020. For this purpose, we establish export production function as based on endogenous growth theory in which role of FDI is considered as additional determinant of export. The Pedroni residual-based co-integration test and Error Correction Model (ECM) are applied for the long and short-run relationships. Pedroni residual based approach highlighted that human capitals, domestic capitals, foreign direct investments, exports, and domestic sales are co-integrated in the long run. According to results of ECM, coefficient of FDI appears to have statistical significant impact on exports and has a positive sign in the long run. Whereas, FDI does not contribute to export growth in the short run but it takes time to influence the growth patterns of the sector. On the basis of theoretical notion of endogenous growth theory, long-run coefficient of FDI may be interpreted as evidence in favour of the hypotheses that FDI has an impact on exports via export development. Thus, it can be concluded that “FDI-based endogenous growth theory” is valid in the case of Pakistan.