Trade liberalization and Foreign Direct Investment in Pakistan

Abstract

The paper studies the impact of trade liberalization on foreign di - rect investment (FDI) in Pakistan using quarterly data from 1972 to 2010. The findings suggest that there is a significant positive re - lation between trade liberalization and FDI. The results are ro - bust under alternative trade liberalization measures and differ - ent model specifications. The results indicate that the factors that drive foreign investment have a differential impact on FDI flows to Pakistan. Specifically, human and physical capitals, capital re - turn, infrastructure development, terms of trade and urbanization promote FDI in Pakistan. Foreign debt and inflation lead to de - teriorating foreign investment in the country. Another important finding is that the effect of trade liberalization on FDI has been augmented after the inception of a flexible exchange rate system in Pakistan. However, this result is not robust to alternative equation