Macroeconomic factors determining FDI impact on Pakistan's growth

Abstract

PurposeThe purpose of this paper is to identify major macroeconomic factors that enhance foreign direct investment (FDI) for Pakistan through the co‐integration and error correction model over a 28‐year time period, i.e. between 1980 and 2008.Design/methodology/approachThe study employed the Johansen co‐integration technique to estimate the long‐run relationship between the variables, while an error correction model was used to determine the short‐run dynamics of the system.FindingsFinding suggests that FDI has had a significant positive impact on Pakistan's economic growth in the long run. For example, trade liberalization and their interactive terms have a positive effect in the short run, while a negative effect is observed in the long run upon economic growth of Pakistan. The results indicate that due to a low quality of human capital in Pakistan; the direct effect of FDI on economic growth becomes negative.Research limitations/implicationsThe study was limited to a few variables, including human capital, trade openness, government size, population and consumer price index, in order to manage robust data analysis.Practical implicationsThe authors find that for FDI to be a significant contributor to economic growth in Pakistan, government must focus upon improving physical infrastructure, and quality of human resources.Originality/valueThe study confirms that Pakistan did not enjoy substantial growth benefits from FDI because human capital, trade openness, government size and interactive terms of FDI and per capita income have a negative impact on economic growth. These findings have important policy implications.